<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1995
REGISTRATION NO. 33-57047
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SHURGARD STORAGE CENTERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 6798 91-1080141
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
1201 THIRD AVENUE, SUITE 2200
SEATTLE, WASHINGTON 98101
(206) 624-8100
(Address and telephone number of
registrant's principal executive offices)
HARRELL L. BECK
1201 THIRD AVENUE, SUITE 2200
SEATTLE, WASHINGTON 98101
(206) 624-8100
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
MICHAEL STANSBURY JOHN M. STEEL EDMUND O. BELSHEIM, JR.
LINDA A. SCHOEMAKER BENJAMIN F. STEPHENS SCOTT L. GELBAND
Perkins Coie Riddell Williams Bullitt & Bogle & Gates
1201 Third Avenue, 40th Floor Walkinshaw Two Union Square
Seattle, Washington 98101-3099 1001 Fourth Avenue, #4400 601 Union Street
(206) 583-8888 Seattle, Washington 98154 Seattle, Washington 98101-2346
(206) 624-3600 (206) 682-5151
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective and the effective
time of the merger of Shurgard Incorporated with and into the registrant, as
described in the Agreement and Plan of Merger dated as of December 19, 1994
attached as Appendix I to the Proxy Statement/Prospectus forming a part of the
Registration Statement.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[Shurgard REIT Letterhead]
February 15, 1995
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Shurgard Storage Centers, Inc. (the "Shurgard REIT") to be
held on Tuesday, March 21, 1995, at 10:00 a.m., local time, at the Washington
State Convention and Trade Center, 800 Convention Place, Room 204, Seattle,
Washington.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the merger of Shurgard Incorporated (the "Management
Company") with and into the Shurgard REIT (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of December 19, 1994 (the "Merger
Agreement"). The purpose of the Merger is for the Shurgard REIT to become
self-administered and self-managed. Pursuant to the Merger Agreement, the
outstanding shares of common stock of the Management Company will be converted
into an aggregate of 1,400,000 shares of Class A Common Stock of the Shurgard
REIT (together with associated purchase rights, the "Shurgard Class A Common
Stock"), subject to certain adjustments based on the market price of the
Shurgard Class A Common Stock and changes to the Management Company's equity
from October 31, 1994 to the closing date of the Merger, and certain adjustments
for Management Company shareholders exercising dissenters' rights. In addition,
pursuant to the Merger Agreement, Management Company shareholders will be
entitled to receive additional shares of Shurgard Class A Common Stock based on
(i) the extent to which, during the five years following the closing of the
Merger, the Shurgard REIT realizes value as a result of certain transactions
relating to interests in or assets of six limited partnerships acquired by the
Shurgard REIT in the Merger and (ii) the value, at the end of five years or in
the event of a change of control, of any remaining interests in such
partnerships as determined by independent appraisal.
IN CONSIDERING THE MERGER AND THE MERGER AGREEMENT, SHURGARD REIT
SHAREHOLDERS SHOULD CONSIDER THE RISKS DESCRIBED IN THE PROXY STATEMENT/
PROSPECTUS RELATING TO THE MERGER. THESE RISKS INCLUDE CERTAIN CONFLICTS OF
INTEREST THAT EXECUTIVE OFFICERS AND DIRECTORS OF THE SHURGARD REIT HAVE WITH
RESPECT TO THE MERGER AND CERTAIN TAX RISKS TO THE SHURGARD REIT RESULTING FROM
THE MERGER.
A special committee consisting of independent directors of the Shurgard
REIT, who are not members of management or employees of the Management Company
(the "Special Committee"), actively negotiated the terms of the Merger and the
Merger Agreement with the Management Company. In connection with such
consideration, the Special Committee retained Alex. Brown & Sons Incorporated
("Alex. Brown") to act as its financial advisor. Alex. Brown has rendered its
opinion that, as of the date of the Merger Agreement, the consideration to be
paid by the Shurgard REIT in the Merger is fair, from a financial point of view,
to the Shurgard REIT. The written opinion of Alex. Brown, dated December 19,
1994, is included as Appendix II to the accompanying Proxy Statement/ Prospectus
and should be read carefully by shareholders. The Special Committee has
unanimously recommended to the Shurgard REIT's Board of Directors that the
Merger Agreement be approved.
THE SPECIAL COMMITTEE AND THE SHURGARD REIT'S BOARD OF DIRECTORS HAVE
DETERMINED THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF THE SHURGARD
REIT AND ITS SHAREHOLDERS, HAVE UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND RECOMMEND A VOTE FOR APPROVAL OF THE MERGER.
<PAGE>
You should carefully read the accompanying Notice of Special Meeting of
Shareholders and the Proxy Statement/Prospectus for details of the Merger and
additional related information.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the enclosed proxy card and return it promptly in the enclosed
postage-prepaid envelope. Your stock will be voted in accordance with the
instructions you have given in your proxy. If you attend the Special Meeting,
you may vote in person if you wish, even though you previously have returned
your proxy card. Your prompt cooperation will be greatly appreciated.
If you have any questions or need assistance in voting your stock, please
call our proxy solicitor for the Special Meeting, D.F. King & Co., Inc., toll
free at 1-800-758-5378.
Sincerely,
Harrell L. Beck
PRESIDENT
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE
ACCOMPANYING POSTAGE-PREPAID ENVELOPE.
<PAGE>
SHURGARD STORAGE CENTERS, INC.
1201 THIRD AVENUE, SUITE 2200
SEATTLE, WASHINGTON 98101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 21, 1995
TO THE HOLDERS OF CLASS A COMMON STOCK OF SHURGARD STORAGE CENTERS, INC.:
A Special Meeting of holders of Class A Common Stock (the "Special Meeting")
of Shurgard Storage Centers, Inc., a Delaware corporation (the "Shurgard REIT"),
will be held on Tuesday, March 21, 1995, at 10:00 a.m., local time, at the
Washington State Convention and Trade Center, 800 Convention Place, Room 204,
Seattle, Washington, for the following purposes:
1. To consider and vote upon a proposal to approve the merger of Shurgard
Incorporated (the "Management Company") with and into the Shurgard REIT (the
"Merger") pursuant to an Agreement and Plan of Merger dated as of December 19,
1994 (the "Merger Agreement") between the Shurgard REIT and the Management
Company. Pursuant to the Merger Agreement, the outstanding shares of common
stock of the Management Company will be converted into an aggregate of 1,400,000
shares of Class A Common Stock of the Shurgard REIT (together with associated
purchase rights, the "Shurgard Class A Common Stock"), subject to certain
adjustments based on the market price of the Shurgard Class A Common Stock and
changes to the Management Company's equity from October 31, 1994 to the closing
date of the Merger, and certain adjustments for Management Company shareholders
exercising dissenters' rights. In addition, pursuant to the Merger Agreement,
Management Company shareholders will be entitled to receive additional shares of
Shurgard Class A Common Stock based on (i) the extent to which, during the five
years following the closing of the Merger, the Shurgard REIT realizes value as a
result of certain transactions relating to interests in or assets of six limited
partnerships acquired by the Shurgard REIT in the Merger and (ii) the value, at
the end of five years or in the event of a change of control, of any remaining
interests in such partnerships as determined by independent appraisal. THE
MERGER IS MORE COMPLETELY DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS, AND A COPY OF THE MERGER AGREEMENT IS ATTACHED AS APPENDIX
I THERETO.
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
Only holders of record of shares of Shurgard Class A Common Stock at the
close of business on January 20, 1995, the record date for the Special Meeting,
are entitled to notice of and to vote at the Special Meeting and at any
adjournments or postponements thereof.
The affirmative vote of the holders of shares representing a majority of the
outstanding shares of Shurgard Class A Common Stock entitled to vote at the
Special Meeting is required to approve the Merger. Holders of shares of Shurgard
Class A Common Stock will not be entitled to dissenters' rights as a result of
the Merger.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOUR STOCK WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS YOU HAVE GIVEN IN YOUR PROXY. YOUR PROXY MAY BE REVOKED AT ANY TIME
BEFORE IT IS VOTED BY SIGNING AND RETURNING A LATER-DATED PROXY WITH RESPECT TO
THE SAME SHARES, BY FILING WITH THE SECRETARY OF THE SHURGARD REIT A WRITTEN
REVOCATION BEARING A LATER DATE OR BY ATTENDING AND VOTING IN PERSON AT THE
SPECIAL MEETING.
By Order of the Board of Directors,
Kristin H. Stred
SECRETARY
Seattle, Washington
February 15, 1995
<PAGE>
SHURGARD STORAGE CENTERS, INC.
PROXY STATEMENT/PROSPECTUS
---------------------
This Proxy Statement/Prospectus is being furnished to holders of shares of
Class A Common Stock, par value $.001 per share (together with associated
purchase rights, the "Shurgard Class A Common Stock"), of Shurgard Storage
Centers, Inc., a Delaware corporation (the "Shurgard REIT"), in connection with
the solicitation of proxies by the Shurgard REIT's Board of Directors for use at
the Special Meeting of Shareholders to be held on Tuesday, March 21, 1995, at
the Washington State Convention and Trade Center, 800 Convention Place, Room
204, Seattle, Washington, commencing at 10:00 a.m., local time, and at any
adjournments or postponements thereof (the "Special Meeting").
At the Special Meeting, shareholders of record of the Shurgard REIT at the
close of business on January 20, 1995, will consider and vote upon (i) a
proposal to approve the merger of Shurgard Incorporated (the "Management
Company") with and into the Shurgard REIT (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of December 19, 1994 (the "Merger
Agreement") between the Shurgard REIT and the Management Company and (ii) such
other business as may properly come before the Special Meeting or any
adjournments or postponements thereof.
Upon consummation of the Merger, the outstanding shares of common stock of
the Management Company (the "Management Company Common Stock") (except shares as
to which dissenters' rights are exercised and not subsequently withdrawn) will
be converted into an aggregate of 1,400,000 shares of Shurgard Class A Common
Stock, subject to certain adjustments based on the market price of the Shurgard
Class A Common Stock and changes to the Management Company's equity from October
31, 1994 to the closing date of the Merger, and certain adjustments for
Management Company shareholders exercising dissenters' rights. In addition,
pursuant to the Merger Agreement, Management Company shareholders will have the
right to receive additional shares of Shurgard Class A Common Stock based on (i)
the extent to which, during the five years following the closing of the Merger,
the Shurgard REIT realizes value as a result of certain transactions relating to
interests in or assets of six limited partnerships acquired by the Shurgard REIT
in the Merger and (ii) the value, at the end of five years or in the event of a
change of control, of any remaining interests in such partnerships as determined
by independent appraisal.
This Proxy Statement/Prospectus constitutes the Prospectus of the Shurgard
REIT filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
shares of Shurgard Class A Common Stock issuable in connection with the Merger.
All information concerning the Shurgard REIT contained in this Proxy
Statement/Prospectus has been furnished by the Shurgard REIT, and all
information concerning the Management Company contained in this Proxy
Statement/Prospectus has been furnished by the Management Company.
This Proxy Statement/Prospectus is first being mailed to holders of Shurgard
Class A Common Stock on or about February 17, 1995.
THE SHARES OF SHURGARD CLASS A COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
FOR A DESCRIPTION OF RISK FACTORS RELATING TO THE MERGER AND THE RELATED
TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS, SEE "RISK FACTORS."
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS FEBRUARY 15, 1995.
<PAGE>
AVAILABLE INFORMATION
The Shurgard REIT is subject to the information and reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
certain regional offices of the Commission located at Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of such information can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. The Registration Statement and any
amendments thereto, including exhibits filed as a part thereof, are available
for inspection and copying as set forth above.
The Management Company is not subject to the information and reporting
requirements of the Exchange Act.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE SHURGARD REIT OR THE MANAGEMENT COMPANY. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE SHURGARD REIT OR THE MANAGEMENT COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS
OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... ii
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 15
Risks Relating to the Merger.......................................... 15
Tax Risks to the Shurgard REIT Resulting From the Merger.............. 17
General Real Estate Investment Risks and Self-Storage Industry
Risks................................................................ 19
Other General Risks................................................... 21
SPECIAL MEETING OF SHAREHOLDERS........................................... 22
General............................................................... 22
Matters to Be Considered at the Special Meeting....................... 22
Record Date; Shares Entitled to Vote; Vote Required................... 22
Proxies; Proxy Solicitation........................................... 23
BACKGROUND OF AND REASONS FOR THE MERGER.................................. 24
Background............................................................ 24
Reasons for the Merger; Recommendations of the Special Committee and
the Shurgard REIT Board.............................................. 29
Opinion of Financial Advisor to the Special Committee................. 30
SHURGARD STORAGE CENTERS, INC............................................. 35
Business.............................................................. 35
Competition........................................................... 42
Selected Financial Data............................................... 43
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 43
POLICIES REGARDING INVESTMENT AND CERTAIN OTHER ACTIVITIES................ 47
Acquisition, Development and Investment Policies...................... 47
Financing and Reserve Policies........................................ 49
Conflict of Interest Policies......................................... 51
Policy With Respect to Dividends and Certain Other Activities......... 51
SHURGARD INCORPORATED..................................................... 53
Management Services................................................... 54
<CAPTION>
PAGE
----
<S> <C>
Relationship With the Shurgard REIT................................... 57
Selected Financial Data............................................... 59
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 59
DISCUSSION OF PRO FORMA POST-MERGER OPERATIONS............................ 64
THE MERGER................................................................ 67
Terms of the Merger................................................... 67
Adjustments to Share Consideration.................................... 67
Indemnification Shares................................................ 68
Contingent Shares..................................................... 69
Effective Time of the Merger.......................................... 74
Fractional Shares..................................................... 75
Exchange of Shares of Management Company Common Stock................. 75
Effect on Management Company Stock Option, Employee Benefit and Stock
Plans................................................................ 75
Trading of Shares of Shurgard Class A Common Stock.................... 75
Representations and Warranties........................................ 75
Business of the Management Company Pending the Merger................. 76
No Solicitation....................................................... 76
InterMation Spin-off.................................................. 77
Shurgard Realty Advisors.............................................. 77
Conditions to Consummation of the Merger.............................. 77
Amendment and Waiver; Termination..................................... 78
Regulatory Matters.................................................... 79
Indemnification of Management Company Directors and Officers.......... 79
Resale of Shares of Shurgard Class A Common Stock Issued in the
Merger; Affiliates................................................... 80
Agreement of Management Company Significant Shareholders to Vote in
Favor of the Merger.................................................. 80
Accounting Treatment.................................................. 80
Expenses and Fees..................................................... 80
Rights of Dissenting Management Company Shareholders.................. 81
FEDERAL INCOME TAX CONSEQUENCES........................................... 82
General............................................................... 82
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tax Treatment of the Merger........................................... 82
Contingent Shares and Indemnification Shares.......................... 83
Exercise of Dissenters' Rights........................................ 84
Built-in Gain Rules................................................... 84
Failure of the Merger to Qualify...................................... 85
Tax Treatment of the InterMation Spin-off............................. 85
Failure of the InterMation Spin-off to Qualify........................ 86
Consequences of the Merger on the Shurgard REIT's Qualification as a
REIT................................................................. 87
Tax Consequences to Management Company Shareholders Receiving Shurgard
Class A Common Stock................................................. 91
State and Local Taxes................................................. 95
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................ 96
Appointment of Officers and a Director of the Shurgard REIT........... 96
Acceleration of the Management Company Stock Options.................. 96
Indemnification of Directors and Officers Pursuant to the Merger
Agreement............................................................ 96
Contingent Shares..................................................... 97
Shurgard Realty Advisors.............................................. 97
COMPARATIVE PER SHARE MARKET INFORMATION.................................. 97
The Shurgard REIT..................................................... 97
The Management Company................................................ 98
DESCRIPTION OF SHURGARD REIT CAPITAL STOCK................................ 98
General............................................................... 98
Common Stock.......................................................... 98
Preferred Stock....................................................... 98
Excess Stock.......................................................... 99
Shareholder Rights Plan............................................... 100
DESCRIPTION OF MANAGEMENT COMPANY CAPITAL STOCK........................... 102
<CAPTION>
PAGE
----
<S> <C>
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE SHURGARD REIT AND OF THE
MANAGEMENT COMPANY....................................................... 102
General............................................................... 103
Changes Principally Attributable to Differences Between the DGCL and
the WBCA............................................................. 103
MANAGEMENT OF THE SHURGARD REIT........................................... 107
Committees of the Shurgard REIT Board................................. 109
Compensation to the Shurgard REIT's Directors and Officers............ 109
EXECUTIVE COMPENSATION.................................................... 110
Compensation Summary.................................................. 110
Option Grants......................................................... 111
Option Exercises and Year-End Values.................................. 111
Certain Relationships and Related Transactions........................ 112
PRINCIPAL SHURGARD REIT SHAREHOLDERS...................................... 113
PRINCIPAL MANAGEMENT COMPANY SHAREHOLDERS................................. 114
LEGAL OPINION............................................................. 115
TAX OPINION............................................................... 115
EXPERTS................................................................... 115
FINANCIAL STATEMENTS...................................................... F-1
Appendix I -- Agreement and Plan of Merger dated as of December 19, 1994 between
Shurgard Storage Centers, Inc. and Shurgard Incorporated
Appendix II -- Opinion of Alex. Brown & Sons Incorporated
</TABLE>
iv
<PAGE>
SUMMARY
CERTAIN SIGNIFICANT MATTERS DISCUSSED IN THIS PROXY STATEMENT/PROSPECTUS ARE
SUMMARIZED BELOW. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED
IN ALL RESPECTS BY REFERENCE TO THE MORE DETAILED INFORMATION APPEARING OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS (INCLUDING THE
APPENDICES HERETO).
THE COMPANIES
<TABLE>
<S> <C>
SHURGARD STORAGE CENTERS, INC..... The Shurgard REIT is a real estate investment trust (a
"REIT") that owns directly and through joint ventures
159 self-storage properties and two office and business
parks. The Shurgard REIT was formed through the
consolidation on March 1, 1994 of 17 publicly held
limited partnerships (the "Consolidation"). The mailing
address of the Shurgard REIT's principal executive
offices is 1201 Third Avenue, Suite 2200, Seattle,
Washington 98101, and its telephone number is (206)
624-8100. See "SHURGARD STORAGE CENTERS, INC."
SHURGARD INCORPORATED............. The Management Company is a real estate operating compa-
ny specializing in all aspects of the self-storage
industry. The mailing address of the Management
Company's principal executive offices is 1201 Third
Avenue, Suite 2200, Seattle, Washington 98101, and its
telephone number is (206) 624-8100. See "SHURGARD
INCORPORATED."
SPECIAL MEETING OF SHAREHOLDERS
DATE, TIME AND PLACE OF THE
SPECIAL MEETING................... The Special Meeting is to be held on Tuesday, March 21,
1995, at 10:00 a.m., local time, at the Washington State
Convention and Trade Center, 800 Convention Place, Room
204, Seattle, Washington.
PURPOSE OF THE SPECIAL MEETING.... At the Special Meeting, holders of shares of Shurgard
Class A Common Stock will consider and vote upon (i) a
proposal to approve the Merger and (ii) such other
business as may properly come before the Special Meeting
or any adjournments or postponements thereof. The Merger
is being submitted to holders of shares of Shurgard
Class A Common Stock for approval in accordance with
Article 16 of the Shurgard REIT's Certificate of
Incorporation.
RECORD DATE....................... Only holders of record of shares of Shurgard Class A
Common Stock at the close of business on January 20,
1995, are entitled to notice of and to vote at the
Special Meeting or any adjournments or postponements
thereof. On that date, 16,829,283 shares of Shurgard
Class A Common Stock were outstanding and entitled to
vote. As of such record date, current directors and
executive officers of the Shurgard REIT and their
affiliates beneficially owned less than 1% of the
outstanding shares of Shurgard Class A Common Stock.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
VOTE REQUIRED..................... The affirmative vote of the holders of a majority of the
outstanding shares of Shurgard Class A Common Stock
entitled to vote at the Special Meeting is required to
approve the Merger. Holders of shares of Class B common
stock of the Shurgard REIT (the "Shurgard Class B Common
Stock") are not entitled to vote at the Special Meeting
(the Shurgard Class A Common Stock and the Shurgard
Class B Common Stock are referred to collectively herein
as the "Shurgard REIT Common Stock"). See "SPECIAL
MEETING OF SHAREHOLDERS -- Record Date; Shares Entitled
to Vote; Vote Required."
THE MERGER
GENERAL........................... Upon the closing of the Merger (the "Closing"), the
Management Company will merge with and into the Shurgard
REIT and the Shurgard REIT will become a
self-administered and self-managed real estate
investment trust. Pursuant to the Merger Agreement, the
outstanding shares of Management Company Common Stock
will be converted into an aggregate of 1,400,000 shares
of Shurgard Class A Common Stock, subject to certain
adjustments based on the market price of the Shurgard
Class A Common Stock and changes to the Management
Company's equity from October 31, 1994 to the date of
the Closing (the "Closing Date"), and certain
adjustments for Management Company shareholders
exercising dissenters' rights (the "Share
Consideration"). Such adjustments to the number of
shares of Shurgard Class A Common Stock to be issued
upon the Closing are subject to certain limits. See "THE
MERGER -- Adjustments to Share Consideration." Based on
the capitalization of the Shurgard REIT as of December
31, 1994, assuming no adjustment is made to the
aggregate number of shares of Shurgard Class A Common
Stock to be issued upon the Closing, as a result of the
Merger "affiliates" (as defined under the Securities
Act) of the Management Company will acquire
approximately 7.2% of the outstanding shares of Shurgard
REIT Common Stock as a result of the Merger (excluding
shares of Shurgard REIT Common Stock beneficially owned
by Management Company affiliates prior to the Merger).
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
RISK FACTORS...................... In considering the Merger and the Merger Agreement,
Shurgard REIT shareholders should consider the risks
presented by the Merger. Following the Merger, executive
officers and directors of the Shurgard REIT will have
voting power with respect to 865,131 shares of Shurgard
REIT Common Stock, which shares will constitute 4.7% of
the total voting power of the Shurgard REIT Common
Stock. The risks relating to the Merger also include
certain conflicts of interest that executive officers
and directors have with respect to the Merger. For
example, certain current executive officers and
directors of the Management Company will serve as
executive officers and directors of the Shurgard REIT
following the Merger, and current executive officers of
the Shurgard REIT will receive shares of Shurgard Class
A Common Stock in the Merger in exchange for shares of
Management Company Common Stock that they hold
(including shares of Management Company Common Stock
that will be acquired by such executive officers
immediately prior to the Merger upon the exercise of
options to purchase shares of Management Company Common
Stock, the vesting of which has been accelerated in con-
nection with the Merger). The Merger also presents the
risk that the Shurgard REIT may not continue to realize
revenues from the Management Company's management
contracts at levels comparable to those realized by the
Management Company. See "RISK FACTORS -- Risks Relating
to the Merger."
In addition, the Merger will result in certain tax risks
to the Shurgard REIT. The Merger is structured to
qualify as a tax-free reorganization and the Shurgard
REIT and the Management Company have obtained an opinion
from counsel that, based on certain assumptions, no gain
or loss will be recognized by the Shurgard REIT or the
Management Company in the Merger. In addition, counsel
to the Management Company will deliver an opinion to the
Management Company that, based on certain assumptions,
the InterMation Spin-off (as defined below), more likely
than not, will not be taxable to the Management Company
or its shareholders. These opinions are not binding on
the Internal Revenue Service (the "IRS"). If the Merger
or the InterMation Spin-off were taxable, the Man-
agement Company and its shareholders would recognize
taxable gain and the Shurgard REIT, as successor to the
Management Company, would be primarily liable for any
resulting tax liability to the Management Company.
Further, as a result of the Merger and assuming no
change in the Shurgard REIT's or the Management
Company's current operations, the Shurgard REIT may
recognize amounts of nonqualified gross income in excess
of the amount permitted for purposes of maintaining REIT
status. If the Shurgard REIT does not distribute prior
to December 31, 1995 all of the accumulated earnings and
profits of the Management Company acquired in the
Merger, the Shurgard REIT would lose its REIT
qualification for the year of the Merger. See "RISK
FACTORS -- Tax Risks to the Shurgard REIT Resulting From
the Merger."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
BENEFITS OF THE MERGER TO THE
SHURGARD REIT.................... Through the Merger, the Shurgard REIT will internalize
the expertise and experience of the Management Company's
personnel, which cover all aspects of the self-storage
industry. In addition, the Shurgard REIT will acquire
contractual rights and other tangible and intangible
assets of the Management Company. Such contractual
rights include the Management Company's rights under
third-party property management and asset management
contracts, license agreements in two markets, leases for
office space and the Management Company's line of
credit. Other assets to be acquired by the Shurgard REIT
from the Management Company as a result of the Merger
include a storage center located in Daly City, Califor-
nia, proprietary operating and computer systems, the
Management Company's rights in the Shurgard name, and
office furniture and equipment. Further, the Shurgard
REIT will acquire the Management Company's interests in
certain partnerships and other entities, including its
limited partnership interest in the general partner of
five partnerships, its general partner interest in two
partnerships and its interest in a Belgian entity;
provided, however, that because the Management Company's
shareholders are entitled to receive additional shares
of Shurgard Class A Common Stock in the future as
Contingent Shares (as defined below) with respect to six
of these partnership interests, the benefit to the
Shurgard REIT of acquiring such partnership interests is
limited to distributions from operating cash flow of
such partnerships. See "THE MERGER -- Contingent
Shares."
CONTINGENT SHARES................. Pursuant to the Merger Agreement, Management Company
shareholders will be entitled to receive additional
shares of Shurgard Class A Common Stock based on (i) the
extent to which, during the five years following the
Closing, the Shurgard REIT realizes value as a result of
certain transactions relating to interests in or assets
of six limited partnerships acquired by the Shurgard
REIT in the Merger and (ii) the value, at the end of
five years or in the event of a change of control, of
any remaining interests in such partnerships as
determined by independent appraisal (the "Contingent
Shares"). See "THE MERGER -- Contingent Shares."
TREATMENT OF OPTIONS.............. Pursuant to the Management Company's stock option plan,
holders of outstanding options to purchase shares of
Management Company Common Stock will have the right to
exercise such options immediately before the Closing,
whether or not the vesting requirements for such options
have been satisfied. All outstanding options to purchase
shares of Management Company Common Stock that are not
exercised before the Closing will terminate.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
RECOMMENDATIONS OF THE SPECIAL
COMMITTEE AND THE BOARD
OF DIRECTORS...................... A special committee consisting of independent directors
of the Shurgard REIT who are not members of management
or employees of the Management Company (the "Special
Committee") received the Management Company's offer with
respect to the Merger and actively negotiated the terms
of the Merger and the Merger Agreement. In connection
with such consideration, the Special Committee retained
Alex. Brown & Sons Incorporated ("Alex. Brown") to act
as its financial advisor and to deliver a written
opinion as to the fairness of the consideration to be
paid by the Shurgard REIT in the Merger, from a
financial point of view, to the Shurgard REIT. The
Special Committee has unanimously recommended to the
Shurgard REIT's Board of Directors (the "Shurgard REIT
Board") that the Merger Agreement be approved. The
Shurgard REIT Board, after considering the recommenda-
tion of the Special Committee, has determined the Merger
Agreement to be fair to and in the best interests of the
Shurgard REIT and its shareholders and has unanimously
approved the Merger Agreement and the Merger. The
Special Committee and the Shurgard REIT Board recommend
that the shareholders of the Shurgard REIT approve the
Merger. The recommendations of the Special Committee and
the Shurgard REIT Board are based upon a number of
factors discussed in this Proxy Statement/Prospectus.
See "BACKGROUND OF AND REASONS FOR THE MERGER."
OPINION OF FINANCIAL ADVISOR...... Alex. Brown has delivered its written opinion, dated
December 19, 1994, to the Special Committee to the
effect that, as of the date of its opinion, the
consideration to be paid by the Shurgard REIT to the
shareholders of the Management Company pursuant to the
Merger Agreement is fair, from a financial point of
view, to the Shurgard REIT. A copy of the written
opinion of Alex. Brown, which sets forth the assumptions
made, matters considered and limits of its review, is
attached to this Proxy Statement/Prospectus as Appendix
II, and should be read in its entirety. See "BACKGROUND
OF AND REASONS FOR THE MERGER -- Opinion of Financial
Advisor to the Special Committee."
EFFECTIVE TIME OF THE MERGER...... Promptly following the satisfaction or waiver (where
permissible) of the conditions to the Merger, the Merger
will be consummated and become effective on the date and
at the time the certificate of merger to be filed
pursuant to the Delaware General Corporation Law (the
"DGCL") and the articles of merger to be filed pursuant
to the Washington Business Corporation Act (the "WBCA")
are duly filed with the Secretary of State of the state
of Delaware and of the state of Washington,
respectively, or such later date and time as may be
specified in such certificate of merger and articles of
merger (the "Effective Time"). See "THE MERGER -- Effec-
tive Time of the Merger" and "-- Conditions to Consumma-
tion of the Merger."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
FRACTIONAL SHARES................. No fractional shares of Shurgard Class A Common Stock
will be issued in the Merger. In lieu thereof, the
Shurgard REIT will pay to any holder otherwise entitled
to a fractional share the cash value thereof. See "THE
MERGER -- Fractional Shares."
EXCHANGE OF CERTIFICATES IN THE
MERGER............................ As soon as reasonably practicable after the Effective
Time, the Shurgard REIT will mail a transmittal form and
instructions to each holder of record of certificates
that immediately prior to the Effective Time represented
outstanding shares of Management Company Common Stock,
which form and instructions are to be used in forwarding
such certificates for surrender and exchange for (i)
certificates representing that number of whole shares of
Shurgard Class A Common Stock that such holder has the
right to receive pursuant to the Merger and (ii) cash
for any fractional share of Shurgard Class A Common
Stock to which such holder otherwise would be entitled.
See "THE MERGER -- Exchange of Shares of Management
Company Common Stock."
TRADING OF SHARES OF SHURGARD REIT
COMMON STOCK ON THE NASDAQ
NATIONAL MARKET................... The shares of Shurgard Class A Common Stock to be issued
in the Merger have been approved for trading on the
Nasdaq National Market, subject to official notice of
issuance.
BUSINESS OF THE MANAGEMENT
COMPANY PENDING THE MERGER........ The Management Company has agreed that, prior to the Ef-
fective Time or earlier termination of the Merger
Agreement, except as permitted by the Merger Agreement,
the Management Company will pursue its business in the
ordinary course and will not engage in any of a number
of actions specified in the Merger Agreement. See "THE
MERGER -- Business of the Management Company Pending the
Merger."
NO SOLICITATION................... The Shurgard REIT and the Management Company have each
agreed that before the Effective Time it will not
initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any
proposal or offer with respect to a merger, acquisition
or similar transaction involving, or any purchase of all
or any significant portion of the assets or any equity
securities of, such party. See "THE MERGER -- No
Solicitation."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
INDEMNIFICATION SHARES............ Pursuant to the Merger Agreement, subject to certain
exceptions, 10% of the shares of Shurgard Class A Common
Stock issuable upon the Closing will be deposited in
escrow. While the indemnification escrow is in place,
the Shurgard REIT will be entitled to recover to the
extent of such shares, subject to certain exceptions and
thresholds, the full dollar amount of losses incurred as
a result of (i) any breach of representation or warranty
made by the Management Company, (ii) any breach by the
Management Company of any covenant or agreement
contained in the Merger Agreement, (iii) any liability
for taxes assessed resulting from a determination that
the InterMation Spin-off does not qualify for tax-free
treatment, (iv) any overstatement of Management Company
equity reflected in the final statement of assets and
liabilities of the Management Company delivered at the
Closing, and (v) liabilities and associated costs that
may arise with respect to general partnership interests.
The indemnification escrow will remain in place for
three years from the Closing, except that the Shurgard
REIT's rights to indemnification with respect to matters
other than employee benefit and retirement plans and
certain tax liabilities will terminate after two years.
Following such three-year period, any remaining shares
in escrow will be returned to the Management Company
shareholders. Notwithstanding the foregoing, the
Shurgard REIT will have recourse against such
shareholders, severally, for tax liabilities associated
with the InterMation Spin-off arising prior to
expiration of the applicable statute of limitations,
limited in amount to the product of the number of shares
released and the Market Value (as defined below) as of
the Closing. An additional 5% of the shares of Shurgard
Class A Common Stock issuable upon the Closing will be
deposited into escrow, subject to (i) the audit by
Deloitte & Touche LLP of the closing statement of assets
and liabilities and (ii) the receipt of an anticipated
tax refund due the Management Company as a result of its
short taxable year ending as of the Effective Time. See
"THE MERGER -- Indemnification Shares."
CONDITIONS OF THE MERGER.......... The Closing of the Merger is subject to the satisfaction
or waiver on or prior to the Closing Date of certain
conditions set forth in the Merger Agreement. See "THE
MERGER -- Conditions to Consummation of the Merger."
TERMINATION....................... The Merger Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval
of matters presented in this Proxy Statement/Prospectus
by the Shurgard REIT shareholders, by mutual written
consent of the Shurgard REIT and the Management Company
or by either the Shurgard REIT or the Management Company
under certain circumstances, including, (i) if any
required vote of the Shurgard REIT shareholders or the
Management Company shareholders has not been obtained,
(ii) if the Merger has not been consummated by May 25,
1995, and (iii) under certain other circumstances. See
"THE MERGER -- Amendment and Waiver; Termination."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
TAX TREATMENT OF MERGER........... The Shurgard REIT and the Management Company have
obtained an opinion from counsel that the Merger will
constitute a reorganization for federal income tax
purposes under the Internal Revenue Code of 1986, as
amended (the "Code"), and, accordingly, that among other
things, no gain or loss will be recognized by the
Management Company or the Shurgard REIT as a result of
the Merger and the Management Company shareholders
should not recognize gain or loss as a result of the
conversion of Management Company Common Stock into
shares of Shurgard Class A Common Stock (except with
respect to any cash received in lieu of fractional
shares of Shurgard Class A Common Stock, with respect to
any dissenting shares and possible imputed interest on
Contingent Shares when and as received). Management
Company shareholders are, however, urged to consult
their own tax advisors as to the specific tax
consequences to them of the Merger. See "FEDERAL INCOME
TAX CONSEQUENCES -- Tax Treatment of the Merger."
REGULATORY MATTERS................ In connection with the Merger, the Shurgard REIT and the
Management Company are required to file notifications
with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the
"Antitrust Division") pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). Consummation of the Merger is conditioned upon,
among other things, expiration of the waiting period
under the HSR Act. The parties to the Merger are not
aware of any other regulatory approvals required to
consummate the Merger. See "THE MERGER -- Regulatory
Matters."
ACCOUNTING TREATMENT.............. The Merger will be accounted for using the purchase
method under generally accepted accounting principles
for accounting and financial reporting purposes.
APPROVAL OF MERGER AGREEMENT
BY MANAGEMENT COMPANY
SHAREHOLDERS...................... The consummation of the Merger is subject to the
approval of the Merger Agreement by Management Company
shareholders. Certain significant shareholders of the
Management Company, who had the power to vote shares
representing an aggregate of approximately 85% of the
outstanding shares of Management Company Common Stock as
of December 31, 1994, have agreed to vote in favor of
the Merger Agreement. Accordingly, approval of the
Merger Agreement by Management Company shareholders is
assured. See "THE MERGER -- Agreement of Management
Company Significant Shareholders to Vote in Favor of the
Merger."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
RESTRICTIONS ON RESALE OF SHARES
OF SHURGARD CLASS A COMMON STOCK
ISSUED IN THE MERGER.............. Pursuant to the Merger Agreement, certain significant
shareholders of the Management Company have agreed not
to sell or otherwise dispose of more than 40% of the
Share Consideration and the Contingent Shares received
by them for a two-year period commencing on the Closing
Date. In addition, shares issued to Management Company
shareholders who are deemed to be "affiliates" of the
Management Company for purposes of Rule 145 under the
Securities Act are not transferable except in compliance
with the Securities Act, including limitations on volume
of sales. Approximately 78% of the shares of Shurgard
Class A Common Stock to be issued pursuant to the Merger
will be held by such affiliates. See "THE MERGER --
Resale of Shares of Shurgard Class A Common Stock Issued
in the Merger; Affiliates."
MANAGEMENT OF THE SHURGARD REIT
FOLLOWING THE MERGER.............. As a result of the Merger, the size of the Shurgard REIT
Board will be expanded by one, with Charles K. Barbo to
serve as the Chairman of the Board. In addition, Mr.
Barbo will be appointed as President and Chief Executive
Officer of the Shurgard REIT and Harrell L. Beck and
Kristin H. Stred will each be appointed as a Senior Vice
President. Mr. Beck will also retain his current
positions of Treasurer and Chief Financial Officer of
the Shurgard REIT, and Ms. Stred will retain her current
positions of Secretary and General Counsel of the
Shurgard REIT. The other current executive officers of
the Shurgard REIT will each remain in their respective
positions after the Merger. See "MANAGEMENT OF THE
SHURGARD REIT."
INTERESTS OF CERTAIN PERSONS IN
THE MERGER........................ The current executive officers of the Shurgard REIT,
Messrs. Beck, Grant and Rowe and Ms. Stred, also
currently serve as executive officers of the Management
Company. As described above, these individuals are
expected to continue to serve as executive officers of
the Shurgard REIT following the Merger. As of December
31, 1994, the current executive officers of the Shurgard
REIT beneficially owned approximately 6.7% of the
outstanding shares of Management Company Common Stock.
See "PRINCIPAL MANAGEMENT COMPANY SHAREHOLDERS." Holders
of outstanding options to purchase shares of Management
Company Common Stock will have the right to exercise
such options immediately prior to the Closing, whether
or not the vesting requirements for such options have
been satisfied. The executive officers of the Shurgard
REIT hold options to purchase an aggregate of 74,500
shares of Management Company Common Stock, the vesting
of 61,168 of which will be accelerated. The Shurgard
REIT has also agreed that it will provide for limitation
of director liability and indemnification of the
Management Company's directors, officers, employees and
agents at least to the extent that such persons are
entitled thereto under the Management Company's charter
documents. See "INTERESTS OF CERTAIN PERSONS IN THE
MERGER."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
DISSENTERS' RIGHTS................ Holders of shares of Shurgard Class A Common Stock will
not be entitled to dissenters' rights as a result of the
Merger.
COMPARATIVE RIGHTS
OF SHAREHOLDERS................... The rights of shareholders of the Management Company, a
Washington corporation, differ in certain respects from
the rights of shareholders of the Shurgard REIT, a
Delaware corporation, as a result of differences between
the WBCA and the DGCL and differences between the
charter documents of the Shurgard REIT and the
Management Company. See "COMPARISON OF RIGHTS OF
SHAREHOLDERS OF THE SHURGARD REIT AND OF THE MANAGEMENT
COMPANY." In addition, the Shurgard REIT has adopted a
shareholder rights plan pursuant to which shareholders
have rights to purchase shares of capital stock of the
Shurgard REIT in certain circumstances. See "DESCRIPTION
OF SHURGARD REIT CAPITAL STOCK."
ACTION TAKEN BY MANAGEMENT COMPANY PRIOR TO THE MERGER
INTERMATION SPIN-OFF AND
DISPOSITION OF SRA................ Prior to the Closing, the Management Company will
dispose of certain of its assets that are unrelated to
the property management, real estate and advisory
services that it performs. The Management Company
currently owns and operates a commercial records storage
business through a subsidiary, InterMation, Inc.
("InterMation"). This subsidiary will be spun-off to
shareholders of the Management Company (the "InterMation
Spin-off"). In addition, Shurgard Realty Advisors, Inc.
("SRA"), which is currently a wholly owned subsidiary of
the Management Company, will be sold by the Management
Company. Unless otherwise indicated, the financial and
other information relating to the Management Company
contained in this Proxy Statement/Prospectus has been
adjusted to reflect only the core business of the
Management Company, which will be acquired by the
Shurgard REIT in the Merger. Accordingly, references to
the "Management Company" and to the "Management Company
Core Business" are to the Management Company as it will
be constituted at the Effective Time. See "THE MERGER --
InterMation Spin-off" and "-- Shurgard Realty Advisors."
</TABLE>
10
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited post-Merger pro forma balance sheet as of September
30, 1994 combines the historical Shurgard REIT balance sheet with the historical
Management Company statement of assets and liabilities as if the Merger had
occurred on September 30, 1994. The unaudited post-Merger pro forma statements
of income for the year ended December 31, 1993 and the nine months ended
September 30, 1994 combine the pro forma Shurgard REIT statements of income
(which consist of the historical statements adjusted to reflect operations as if
the Consolidation had occurred on January 1, 1993) with the pro forma Management
Company statements of revenues and expenses (which consist of the historical
statements adjusted to reflect the acquisition of the Daly City storage center
as if such acquisition had occurred on January 1, 1993) as if the Merger had
occurred on January 1, 1993. These statements are prepared on the basis of
accounting for the Merger as a purchase and should be read in conjunction with
all financial statements included elsewhere in this Prospectus/Proxy Statement.
The following unaudited pro forma combined financial information is not
necessarily indicative of actual or future operating results or financial
position that would have occurred or will occur upon consummation of the Merger.
POST-MERGER BALANCE SHEET
SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHURGARD
REIT MANAGEMENT POST-MERGER
PRO FORMA COMPANY ADJUSTMENTS PRO FORMA
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Storage centers................................. $451,799 $ 7,089 $ 576(a) $459,464
Cash and cash equivalents....................... 19,299 888 (888)(b) 19,299
Investment in joint ventures.................... 2,450 2,450
Other assets.................................... 11,226 3,476 24,411(c) 38,147
(966)(d)
--------- ---------- ----------- -----------
Total assets.................................. $484,774 $11,453 $23,133 $519,360
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
Liabilities and shareholders' equity:
Accounts payable and other liabilities.......... $ 10,539 $ 1,279 $ (966)(d) $ 11,370
518(e)
Lines of credit................................. 30,000 2,112(b) 32,112
Notes payable................................... 125,121 7,275 132,396
--------- ---------- ----------- -----------
Total liabilities............................. 165,660 8,554 1,664 175,878
--------- ---------- ----------- -----------
Shareholders' equity.............................. 316,348 2,899 (3,000)(b) 340,716
24,469(c)
Retained earnings................................. 2,766 2,766
--------- ---------- ----------- -----------
319,114 2,899 21,469 343,482
--------- ---------- ----------- -----------
Total liabilities and shareholders' equity.... $484,774 $11,453 $23,133 $519,360
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
<FN>
- ------------------------------
(a) Represents management's estimate to adjust the book value of the Daly City
storage center to fair market value. The adjustment was computed by
capitalizing the annualized operating results of the storage center as of
September 30, 1994 at 10%, resulting in an estimated market value of
$7,665,000.
(b) Represents $3 million committed to subsidiaries as of September 30, 1994;
such subsidiaries are not being acquired by the Shurgard REIT in the
Merger.
(c) Represents adjustments for excess of purchase price over tangible assets
and liabilities to be recognized in connection with the Merger, assuming
the price of Shurgard Class A Common Stock is $18.78 per share at the
Closing (which was the Market Value of the Shurgard Class A Common Stock on
the date the Merger Agreement was executed). After giving effect to the
adjustment based on the equity of the Management Company required in the
Merger Agreement, the number of shares to be issued to the Management
Company is 1,322,894 shares. This adjustment reflects the Management
Company's estimate of (i) the investment in subsidiaries described in
footnote (b) above, (ii) bonuses of cash and shares of Management Company
Common Stock to be paid prior to the Merger, (iii) the results of
operations from October 1, 1994 through the Closing and (iv) the amount of
an anticipated federal income tax refund.
(d) Eliminates intercompany receivable/payable for management fees and
reimbursable expenses related to the Shurgard REIT and its subsidiaries.
The remaining amount due from affiliates reflected in the financial
statements of the Management Company relates to partnerships affiliated
with the Management Company.
(e) Accrues lender's 90% interest in any accretion in value of the Daly City
storage center. The lender is entitled to 90% of any realized gain on the
sale of the storage center (90% of $576,000 is $518,000; see footnote (a)
above). This payment, however, is not triggered by the Merger, but would be
payable if the property were sold to a third party.
</TABLE>
11
<PAGE>
POST-MERGER CONSOLIDATION
STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHURGARD MANAGEMENT
REIT COMPANY POST-MERGER
PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues....................... $58,169 $ 776 $ -- $58,945
Management fees....................... 5,419 (3,529)(a) 1,890
Equity in earnings of affiliated
partnerships......................... 226 226
Acquisition and development fees...... 26 (14)(a) 12
Reimbursements from affiliates........ 1,798 (1,357)(a) 441
Interest income....................... 608 81 689
---------- ---------- ----------- -----------
Total revenues.................... 58,777 8,326 (4,900) 62,203
Expenses:
Operating............................. 13,530 2,763 16,293
Property management fees.............. 3,480 49 (3,529)(a)
Depreciation and amortization......... 9,740 189 646(b) 10,575
Real estate taxes..................... 5,250 5,250
Interest.............................. 7,931 528 143(c) 8,602
General and administrative............ 2,133 2,797 (1,371)(a) 3,559
---------- ---------- ----------- -----------
Total expenses.................... 42,064 6,326 (4,111) 44,279
---------- ---------- ----------- -----------
Net income before extraordinary item.... $16,713 $2,000 $ (789) $17,924
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Per share data:
Net income before extraordinary
item................................. $ 0.98(d) $ 0.92(e) $ 0.98(f)
<FN>
- ------------------------
(a) Subsequent to the Merger, the Shurgard REIT will be self-administered and,
as such, will not pay management fees or reimbursements to the Management
Company. Expenses relating to personnel and general and administrative
costs now recognized by the Management Company, to the extent not
reimbursed by third parties, will be the responsibility of the Shurgard
REIT.
(b) Adjustment represents the amortization of the excess of the purchase price
over tangible assets and additional depreciation on the Daly City storage
center to be recognized in connection with the Merger over the estimated
useful life of 29 years.
(c) Adjustment represents interest at 9% on the line of credit to be assumed in
connection with the Merger.
(d) Per share data is calculated using the actual shares outstanding since the
Consolidation (16,983,887 shares).
(e) Per share data is calculated by dividing Management Company financial
information, net of adjustments shown to give effect to the Merger, by the
net increase in shares of Shurgard REIT Common Stock resulting from the
Merger (1,322,894 shares). See footnote (c) to the Post-Merger Balance
Sheet above.
(f) Per share data is calculated using the aggregated number of shares of (d)
plus (e) above.
</TABLE>
12
<PAGE>
POST-MERGER CONSOLIDATION
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHURGARD
REIT MANAGEMENT POST-MERGER
PRO FORMA COMPANY ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues....................... $72,310 $ 969 $ -- $73,279
Management fees....................... 6,447 (4,317)(a) 2,130
Equity in earnings of affiliated
partnerships......................... 243 243
Acquisition and development fees...... 86 86
Reimbursements from affiliates........ 1,466 (708)(a) 758
Interest income....................... 590 124 714
---------- ---------- ----------- -----------
Total revenues.................... 72,900 9,335 (5,025) 77,210
Expenses:
Operating............................. 16,840 3,803 20,643
Property management fees.............. 4,317 (4,317)(a)
Depreciation and amortization......... 12,887 291 861(b) 14,039
Real estate taxes..................... 7,068 7,068
Interest.............................. 10,303 588 190(c) 11,081
General and administrative............ 2,390 3,492 (708)(a) 5,174
---------- ---------- ----------- -----------
Total expenses.................... 53,805 8,174 (3,974) 58,005
---------- ---------- ----------- -----------
Net income.............................. $19,095 $1,161 $(1,051) $19,205
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Per share data:
Net income............................ $ 1.12(e) $ 0.08(f) $ 1.05(g)
<FN>
- ------------------------
(a) Subsequent to the Merger, the Shurgard REIT will be self-administered and,
as such, will not pay management fees or reimbursements to the Management
Company. Expenses relating to personnel and general and administrative
costs now recognized by the Management Company, to the extent not
reimbursed by third parties, will be the responsibility of the Shurgard
REIT.
(b) Adjustment represents the amortization of the excess of the purchase price
over tangible assets and additional depreciation on the Daly City storage
center to be recognized in connection with the Merger over the estimated
useful life of 29 years.
(c) Adjustment represents interest at 9% on the line of credit to be assumed in
connection with the Merger.
(d) Per share data is calculated using the actual shares outstanding since the
Consolidation (16,983,887 shares).
(e) Per share data is calculated by dividing Management Company financial
information, net of adjustments shown to give effect to the Merger, by the
net increase in shares of Shurgard REIT Common Stock resulting from the
Merger (1,322,894 shares). See footnote (c) to the Post-Merger Balance
Sheet above.
(f) Per share data is calculated using the aggregated number of shares of (d)
plus (e) above.
</TABLE>
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for the Shurgard
REIT (on a historical and a pro forma basis) and for the Management Company (on
a historical and a pro forma equivalent basis) based upon the historical
consolidated financial statements of the Shurgard REIT and of the Management
Company. The pro forma combined information is not necessarily indicative of
actual or future operating results or the financial position that would have
occurred or will occur upon consummation of the Merger. The information
presented below should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements and the separate historical consolidated financial
statements of the Shurgard REIT and of the Management Company included elsewhere
in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR NINE
AT OR FOR YEAR ENDED MONTHS ENDED
DECEMBER 31, 1993 SEPTEMBER 30, 1994
--------------------- -------------------
<S> <C> <C>
THE SHURGARD REIT:
Historical:
Net income before extraordinary item................................. $ 1.12(a) $ 0.98(a)
Cash distributions................................................... 1.50(a)(b) 1.25(a)(b)
Distribution required to retain REIT status.......................... 1.22(c) .99(c)
Amount of distribution constituting return of capital................ .20(d) .20(d)
Book value........................................................... 19.78(a) 18.79
Post-Merger Pro Forma:
Net income before extraordinary item................................. 1.05(e) 0.98(e)
Cash distributions................................................... 1.45(b) 1.25(b)
Distribution required to retain REIT status.......................... 1.19(c) 1.01(c)
Amount of distribution constituting return of capital................ .19(d) .17(d)
Book value........................................................... N/A 18.76(e)
THE MANAGEMENT COMPANY:
Historical (f):
Net income........................................................... 0.28 0.48
Cash distributions................................................... -- --
Book value........................................................... 0.74 0.70
Pro Forma Equivalent (g):
Net income........................................................... 0.08 0.92
Cash distributions................................................... -- --
Book value........................................................... N/A 18.42
<FN>
- ------------------------------
(a) Pro forma net income before extraordinary item for the year ended December
31, 1993 and the nine months ended September 30, 1994, as well as book
value at December 31, 1993, are calculated as if the Consolidation had
occurred and the current debt structure existed on January 1, 1994, divided
by the current number of outstanding shares of Shurgard REIT Common Stock
(16,983,887 shares).
(b) Cash distributions per share is calculated by multiplying funds from
operations ("FFO") by 80% (the ratio of actual Shurgard REIT cash
distributions for the nine months ended September 30, 1994 compared to the
actual FFO for the same period) and dividing the result by the
corresponding number of shares outstanding. FFO is defined as net income
before extraordinary items (determined in accordance with generally
accepted accounting principles ("GAAP")) plus depreciation and
amortization, plus or minus nonrecurring income and expenses, and other
noncash items. FFO should not be considered as an alternative to net income
(determined in accordance with GAAP), as an indication of the Shurgard
REIT's financial performance or cash flow from operating activities
(determined in accordance with GAAP), or as a measure of liquidity, nor is
it necessarily indicative of sufficient cash flow to fund all of the
Shurgard REIT's needs. The actual distributions during the year in which
the Merger occurs will be increased as necessary to distribute the
accumulated earnings and profits of the Management Company acquired by the
Shurgard REIT in the Merger as well as other current prior accumulated
earnings and profits of the Shurgard REIT. See "FEDERAL INCOME TAX
CONSEQUENCES -- Consequences of the Merger on the Shurgard REIT's
Qualification as a REIT -- Distributions of Accumulated Earnings and
Profits Attributable to Non-REIT Years."
(c) Amounts represent 95% of pro forma taxable income before extraordinary
items for the respective periods divided by the corresponding number of
shares outstanding.
(d) Shurgard REIT cash distributions are generally characterized as dividends
to the extent of the Shurgard REIT's accumulated and current earnings and
profits as calculated for federal income tax purposes. Any distributions in
excess of such earnings and profits are treated as a return of capital to
the extent of a shareholder's basis in his or her shares of Shurgard REIT
Common Stock and as capital gain thereafter. Amounts represent the excess
of cash distributions on an accrual basis over the amount of pro forma
earnings and profits for the respective periods divided by the
corresponding number of shares outstanding.
(e) The pro forma combined financial data give effect to the Merger by
combining the financial statement data of the Shurgard REIT and of the
Management Company using the purchase method of accounting. Total
post-Merger outstanding shares (18,306,781 shares) are assumed to be
currently outstanding shares of the Shurgard REIT and the number of shares
expected to be issued to Management Company shareholders in connection with
the Merger.
(f) Amounts represent the pro forma financial information of the Management
Company, as if the Daly City storage center had been acquired on January 1,
1993, divided by the number of outstanding shares of Shurgard Incorporated
(4,157,986 shares as of September 30, 1994).
(g) Amounts represent the pro forma financial information of the Management
Company, net of adjustments to give effect to the Merger, divided by the
1,322,894 shares of Shurgard Class A Common Stock to be issued in
connection with the Merger. See footnote (c) to the Post-Merger Balance
Sheet above.
</TABLE>
14
<PAGE>
RISK FACTORS
In considering the Merger and the Merger Agreement, the Shurgard REIT
shareholders and the Management Company shareholders should take into account
the following:
RISKS RELATING TO THE MERGER
OWNERSHIP OF SHURGARD REIT COMMON STOCK BY EXECUTIVE OFFICERS AND
DIRECTORS. Following the Merger, executive officers and directors of the
Shurgard REIT will own an aggregate of 788,602 shares of Shurgard Class A Common
Stock (assuming exercise of all outstanding options to purchase Management
Company Common Stock), which will constitute 3.6% of the outstanding shares of
Shurgard Class A Common Stock, and 76,529 shares of Shurgard Class B Common
Stock, which constitutes 49.5% of the outstanding shares of Shurgard Class B
Common Stock. Holders of Shurgard Class A Common Stock and Shurgard Class B
Common Stock are entitled to one vote per share. Accordingly, following the
Merger, executive officers and directors of the Shurgard REIT will have voting
power with respect to 865,131 shares of Shurgard REIT Common Stock, which shares
will constitute 4.7% of the total voting power of the Shurgard REIT Common
Stock. See "PRINCIPAL SHURGARD REIT SHAREHOLDERS." In addition, such individuals
may be issued additional shares of Shurgard Class A Common Stock in the future
as Contingent Shares.
CERTAIN MANAGEMENT COMPANY EXECUTIVE OFFICERS AND DIRECTORS TO SERVE AS
SHURGARD REIT EXECUTIVE OFFICERS AND DIRECTORS FOLLOWING THE MERGER. Certain
current executive officers and directors of the Management Company will serve as
executive officers and directors of the Shurgard REIT following the Merger. As a
result of the Merger, Charles K. Barbo, who is currently Chairman of the Board,
President and Chief Executive Officer of the Management Company, will be
appointed as the Shurgard REIT's Chairman of the Board, President and Chief
Executive Officer and Harrell L. Beck and Kristin H. Stred, who are each
currently executive officers of the Management Company, will each be appointed
as a Senior Vice President of the Shurgard REIT. Mr. Beck will also retain his
current positions of Treasurer and Chief Financial Officer of the Shurgard REIT,
and Ms. Stred will retain her current positions of Secretary and General Counsel
of the Shurgard REIT. Messrs. Barbo and Rowe will be directors of InterMation
after the Merger and will own 36.9% and 3.9%, respectively, of InterMation's
outstanding stock (assuming exercise of all outstanding options to purchase
Management Company Common Stock). In addition, the other officers of the
Shurgard REIT will own 2.8% of such stock. Accordingly, such individuals may
have conflicts of interest in transactions relating to InterMation and in the
allocation of their time. See "SHURGARD INCORPORATED -- Relationship With the
Shurgard REIT -- Property Management Services," "PRINCIPAL MANAGEMENT COMPANY
SHAREHOLDERS" and "INTERESTS OF CERTAIN PERSONS IN THE MERGER."
BENEFITS OF THE MERGER TO CURRENT EXECUTIVE OFFICERS OF THE SHURGARD REIT
AND CURRENT EXECUTIVE OFFICERS OF THE MANAGEMENT COMPANY. The current executive
officers of the Shurgard REIT are shareholders of the Management Company and
currently also serve as executive officers of the Management Company. In
addition, Charles K. Barbo, who is currently an executive officer of the
Management Company, will be appointed as an executive officer of the Shurgard
REIT upon the Closing of the Merger. In connection with the Merger, these
executive officers will receive certain benefits. Specifically, immediately
prior to the Merger the vesting of all outstanding options to purchase shares of
Management Company Common Stock will be accelerated. The current executive
officers of the Shurgard REIT expect to exercise stock options to purchase
74,500 shares of Management Company Common Stock immediately prior to the Merger
(the vesting of 61,168 of which will be accelerated), at a weighted average
price of $3.34 per share. The fair market value of the shares of Shurgard Class
A Common Stock to be received by current executive officers of the Shurgard REIT
and of the Management Company upon the Closing in exchange for their shares of
Management Company Common Stock (including shares acquired upon the exercise of
options), based on the closing price of the Shurgard REIT Common Stock as of
February 10, 1995 ($23.125 per share), is approximately $16,095,000. The
Shurgard REIT has also agreed that it will provide for limitation of director
liability and indemnification of the Management Company's directors, officers,
employees and agents at least to the extent that
15
<PAGE>
such persons are entitled thereto under the Management Company's Articles of
Incorporation and By-Laws. Further, the Management Company has agreed to sell
SRA, currently a wholly owned subsidiary of the Management Company, to a
corporation owned by Mr. Barbo for a $25,000 promissory note prior to the
Closing. See "THE MERGER -- Shurgard Realty Advisors" and "INTERESTS OF CERTAIN
PERSONS IN THE MERGER."
INTERMATION NOT ACQUIRED BY THE SHURGARD REIT. InterMation is not being
acquired by the Shurgard REIT in the Merger and was not included in determining
the purchase price to be paid to the shareholders of the Management Company. See
"BACKGROUND OF AND REASONS FOR THE MERGER -- Background." The Shurgard REIT
declined to include InterMation in the Merger because its revenue represents
nonqualifying income for a REIT for federal income tax purposes and it would not
qualify as a "qualified REIT subsidiary." Its inclusion, therefore, would result
in the disqualification of the Shurgard REIT. See "FEDERAL INCOME TAX
CONSEQUENCES -- Consequences of the Merger on the Shurgard REIT's Qualification
as a REIT -- Nonqualifying Income." As a consequence of this decision, the
future benefits to be derived from the operation of InterMation, if any, will be
received by the shareholders of the Management Company (including members of
management of the Shurgard REIT after the Merger) and not by the Shurgard REIT
or its shareholders.
PARTNERSHIP INTERESTS AND CONTINGENT SHARES. Although the Shurgard REIT is
acquiring certain partnership interests held by the Management Company,
substantially all of the appreciation in the value of such partnership interests
during the next five years will inure to the benefit of the shareholders of the
Management Company in the form of Contingent Shares. The Shurgard REIT declined
to pay currently for such partnership interests because the Special Committee
believed that the value of such interests was too uncertain to be valued
accurately and that valuation and payment should occur in the future when actual
transactions or appraisals made valuation more reliable. See "THE MERGER --
Contingent Shares." As a consequence of this decision, the future benefits to be
derived from such partnership interests (except current operating cash flow and
appreciation after five years following the Closing), if any, will be received
by the shareholders of the Management Company (including members of management
of the Shurgard REIT after the Merger) and not by the Shurgard REIT or its
shareholders. Charles K. Barbo, who will be appointed Chief Executive Officer of
the Shurgard REIT in connection with the Merger, holds interests in certain of
the partnerships and, accordingly, may have conflicts of interest in future
transactions relating to these partnerships. See "INTERESTS OF CERTAIN PERSONS
IN THE MERGER."
DISPOSITION OF SHURGARD REALTY ADVISORS. SRA, a wholly owned subsidiary of
the Management Company, is being sold to Shurgard General Partner, Inc., a
corporation wholly owned by Charles K. Barbo, and will not be acquired by the
Shurgard REIT in the Merger. SRA would not qualify as a "qualified REIT
subsidiary" and therefore its inclusion in the Merger could jeopardize the
Shurgard REIT's continued qualification as a REIT for federal income tax
purposes. Mr. Barbo is purchasing SRA for a $25,000 note, which is equal to the
net capital of the Company. SRA was not included in determining the purchase
price of the Management Company. SRA is a registered broker dealer and after the
Merger has agreed to provide such services to the Shurgard REIT at cost.
Nevertheless, the Shurgard REIT will not receive the possible benefits of owning
SRA directly or of selling it to a third party.
SHURGARD REIT SUBJECT TO EMPLOYER LIABILITIES. The Shurgard REIT does not
currently directly employ any employees. As a result of the Merger, the Shurgard
REIT will directly employ persons that are currently employees of the Management
Company. As an employer, the Shurgard REIT will be subject to those potential
liabilities that are commonly faced by employers, such as workers' disability
and compensation claims, potential labor disputes and other employee-related
grievances.
REVENUE STREAM FROM MANAGEMENT AGREEMENTS SUBJECT TO CANCELLATION. As a
result of the Merger, the Shurgard REIT will become the property manager of
certain properties owned by third parties which have contracted with the
Management Company to provide property management services. The Shurgard REIT
will succeed to all of the Management Company's rights and obligations under
such management and related agreements. These agreements may generally be
terminated by the property
16
<PAGE>
owner upon 60 days' notice, with or without cause. There can be no assurance
that these agreements will not be terminated or that the Shurgard REIT will
continue to realize revenues from such agreements at levels comparable to those
realized by the Management Company. See "SHURGARD INCORPORATED -- Management
Services."
TAX RISKS TO THE SHURGARD REIT RESULTING FROM THE MERGER
POSSIBLE TREATMENT OF MERGER AS A TAXABLE EVENT. In connection with the
Merger, Perkins Coie, counsel to the Shurgard REIT, has delivered an opinion
that, among other things, for federal income tax purposes under current law (i)
the Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code and (ii) no gain or loss will be recognized by the Shurgard
REIT or the Management Company in the Merger. See "FEDERAL INCOME TAX
CONSEQUENCES -- Tax Treatment of the Merger."
This opinion will be based on the accuracy of certain representations made
by the Shurgard REIT, the Management Company and certain Management Company
shareholders and on certain assumptions. Furthermore, this opinion will not be
binding upon the IRS. Therefore, the IRS may contest the qualification of the
Merger as a reorganization under Section 368(a) of the Code. If such a contest
were successful, the Merger would be a taxable transaction and the Management
Company would recognize gain in an amount equal to the excess of the fair market
value of the Shurgard Class A Common Stock issued in the Merger, including the
Contingent Shares when and as received, over the adjusted tax basis of the
assets transferred to the Shurgard REIT. As the successor to the Management
Company, the Shurgard REIT would be primarily liable for this resulting tax
liability. See "FEDERAL INCOME TAX CONSEQUENCES -- Failure of the Merger to
Qualify." Furthermore, immediately prior to the Merger, the Management Company
will distribute all of the shares of common stock of InterMation to the
Management Company shareholders in the InterMation Spin-off, which is intended
to be treated as a tax-free distribution under Section 355(a)(1) of the Code.
See "FEDERAL INCOME TAX CONSEQUENCES -- Tax Treatment of the InterMation
Spin-off." The failure of the Merger to qualify under Section 368(a) of the Code
may cause the InterMation Spin-off to fail to qualify under Section 355(a)(1) of
the Code. See "-- Possible Treatment of InterMation Spin-off as a Taxable
Event."
POSSIBLE TREATMENT OF INTERMATION SPIN-OFF AS A TAXABLE EVENT. In
connection with the InterMation Spin-off, Riddell, Williams, Bullitt &
Walkinshaw, counsel to the Management Company, will deliver an opinion to the
Management Company that, among other things, it is more likely than not under
current law that (i) the distribution of the shares of InterMation common stock
in the InterMation Spin-off will be treated as a distribution under Section
355(a)(1) of the Code, (ii) no gain or loss will be recognized by (and no amount
will be included in the income of) the Management Company shareholders upon
their receipt of the shares of InterMation common stock, and (iii) no gain or
loss will be recognized by the Management Company upon the distribution of all
of the shares of InterMation common stock to the Management Company
shareholders. This opinion will be based on the accuracy of certain
representations made by the Management Company and certain Management Company
shareholders and on certain assumptions. This opinion will not be binding upon
the IRS and, based on its current ruling guidelines, the IRS has informally
stated that it will not rule on the federal tax treatment with respect to the
InterMation Spin-off. Therefore, the IRS may contest the qualification of the
InterMation Spin-off as a tax-free distribution under Section 355(a)(1) of the
Code. If this contest were successful, the InterMation Spin-off would be a
taxable transaction and the Management Company would recognize gain in an amount
equal to the excess of the value of the shares of InterMation common stock it
distributes in the InterMation Spin-off over its basis in such shares. As the
successor to the Management Company, the Shurgard REIT would be primarily liable
for this resulting tax liability. See "FEDERAL INCOME TAX CONSEQUENCES --
Failure of the InterMation Spin-off to Qualify."
INCREASE IN NONQUALIFYING INCOME. The Management Company currently performs
property management services for third-party self-storage facilities, which
services the Shurgard REIT will perform after the Merger. Gross income received
from such services will not be treated as income qualifying for
17
<PAGE>
certain REIT gross income tests of the Shurgard REIT. This income, including
reimbursements and acquisition and development fees received from third parties,
amounts to $2,496,000 for the nine months ended September 30, 1994 and
$2,974,000 for the year ended December 31, 1993. These amounts represent, on a
post-Merger pro forma basis, approximately 4.0% and 3.9% of the total gross
revenues of the Shurgard REIT and the Management Company for each of these
respective periods. The addition of this income increases aggregate
nonqualifying income, on a pro forma basis, to approximately 6.6% and 6.4%,
respectively, for these periods. In 1995 and future years, if nonqualifying
income were to exceed 5% of the total gross income of the Shurgard REIT, the
REIT status of the Shurgard REIT would terminate for that year and future years
unless the Shurgard REIT meets certain reasonable cause standards. Even if it
meets such standards, however, the Shurgard REIT would be subject to an excise
tax on any excess nonqualifying income. If there was no change in the Shurgard
REIT's current revenues and assuming that the Merger closed on March 31, 1995,
the Shurgard REIT would earn nonqualifying income of approximately 4.9% of its
total gross income in 1995 and would earn nonqualifying income of approximately
5.7% of its total gross income in subsequent years, thereby failing the 95%
test. The Shurgard REIT plans to acquire additional properties and develop new
properties to reduce the percentage of nonqualifying income. There can be no
assurance, however, that acquisitions and development activities will occur on
such a scale or within such time periods that nonqualifying income will meet the
95% test for future years. Accordingly, the Shurgard REIT may be required to
defer or reduce its income from such third-party management services to avoid
the risk of terminating its REIT qualification or paying an excise tax. See
"FEDERAL INCOME TAX CONSEQUENCES -- Consequences of the Merger on the Shurgard
REIT's Qualification as a REIT -- Nonqualifying Income."
MERGER WILL NECESSITATE DISTRIBUTIONS OF ACCUMULATED EARNINGS AND
PROFITS. The accumulated earnings and profits of the Management Company will
carry over to the Shurgard REIT in the Merger. To retain its REIT status, the
Shurgard REIT must distribute all of these acquired Management Company earnings
and profits on or before December 31, 1995. Accordingly, the Shurgard REIT will
be required to accurately determine the amount of acquired Management Company
accumulated earnings and profits and to increase its distributions to its
shareholders in 1995 to eliminate these earnings and profits. To the extent the
increased distributions represent the Management Company's accumulated earnings
and profits, they will be treated as a taxable dividend to the Shurgard REIT
shareholders during 1995. In the event the IRS subsequently determines that the
Shurgard REIT failed to distribute all the acquired accumulated earnings and
profits acquired from the Management Company, the Shurgard REIT may lose its
REIT qualification for the year of the Merger and, perhaps, for subsequent
years. See "FEDERAL INCOME TAX CONSEQUENCES -- Consequences of the Merger on the
Shurgard REIT's Qualification as a REIT -- Distributions of Accumulated Earnings
and Profits Attributable to Non-REIT Years."
THE SHURGARD REIT'S QUALIFICATION AS A REIT. In the Merger, the Management
Company shareholders will be receiving shares in a publicly traded REIT as
consideration for their interests in the Management Company. The amount of
distributions made to each shareholder with respect to such shares will depend
upon the Shurgard REIT's continued qualification to be taxed as a REIT. As a
REIT, the Shurgard REIT will be entitled to a deduction when calculating its
taxable income for dividends paid to its shareholders. In order for the Shurgard
REIT to qualify as a REIT, however, certain detailed technical requirements must
be met (including certain income, asset and stock ownership tests). See "FEDERAL
INCOME TAX CONSEQUENCES -- Tax Consequences to Management Company Shareholders
Receiving the Shurgard Class A Common Stock." Furthermore, some of the
attributes of the Management Company may adversely affect the Shurgard REIT's
qualification as a REIT. See "-- Increase in Nonqualifying Income" and "--
Distributions of Accumulated Earnings and Profits." For any taxable year that
the Shurgard REIT fails to qualify as a REIT, it would not be entitled to a
deduction for dividends paid to its shareholders in calculating its taxable
income. Consequently, the net assets of the Shurgard REIT and distributions to
shareholders would be substantially reduced because of the increased tax
liability of the Shurgard REIT. Furthermore, to the extent that distributions
had been made in anticipation of the Shurgard REIT's qualification as a
18
<PAGE>
REIT, the Shurgard REIT might be required to borrow additional funds or to
liquidate certain of its investments in order to pay the applicable tax. Should
the Shurgard REIT's qualification as a REIT terminate, the Shurgard REIT may not
be able to elect to be treated as a REIT for the subsequent five-year period.
See "FEDERAL INCOME TAX CONSEQUENCES -- Tax Consequences to Management Company
Shareholders Receiving Shurgard Class A Common Stock--Failure of the Shurgard
REIT to Qualify as a REIT."
GENERAL REAL ESTATE INVESTMENT RISKS AND SELF-STORAGE INDUSTRY RISKS
GENERAL RISKS RELATING TO OWNERSHIP AND OPERATION OF SELF-STORAGE
FACILITIES. Investments in the Shurgard REIT are subject to the risks incident
to the ownership and operation of self-storage facilities. These include the
risks normally associated with changes in general national economic or local
market conditions, competition for tenants, changes in market rental rates and
the need to periodically renovate, repair and relet space and to pay the cost
therefor.
DEBT FINANCING OBLIGATIONS. The Shurgard REIT is authorized to borrow funds
up to a maximum of the lesser of 50% of its total assets and 300% of its
adjusted net worth. Such limitations on indebtedness, which are contained in the
Shurgard REIT's By-Laws, may not be amended without shareholder approval. As of
December 31, 1994, the Shurgard REIT's indebtedness totaled 33% of its total
assets and 50.7% of its adjusted net worth (as such terms are defined in the
By-Laws). To the extent the Shurgard REIT incurs such indebtedness, it is
subject to the risks associated with debt financing, including the risk that its
cash flow from operations will be insufficient to meet required payments of
principal, the risk that indebtedness on its properties (which in many cases
will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness, and the risk that necessary capital expenditures
for such purposes as renovations and reletting space will not be able to be
financed on favorable terms, if at all. If a property is mortgaged to secure
payment of indebtedness and the Shurgard REIT is unable to meet mortgage
payments, the property could be transferred to the mortgagee with a consequent
loss of income and asset value to the Shurgard REIT.
RISKS OF REAL ESTATE DEVELOPMENT. The Shurgard REIT may invest new capital
or reinvest sale or refinancing proceeds to develop properties or to purchase
newly constructed properties that are still in the lease-up stage. Real estate
development involves significant risks in addition to those involved in the
ownership and operation of established properties, including the risks that
financing may not be available on favorable terms for development projects, that
construction may not be completed on schedule, resulting in increased debt
service expense and construction costs, that long-term financing may not be
available upon completion of construction and that properties may not be leased
on profitable terms or in accordance with scheduled lease-up plans. In addition,
in order to develop properties, the Shurgard REIT must engage appropriate
contractors and/or subcontractors to construct the properties, and problems may
arise in connection with such engagements, thereby increasing the cost of the
construction and resulting in delays in completion. If the Shurgard REIT elects
to develop properties, and if any of the above were to occur, the Shurgard
REIT's ability to make expected distributions to shareholders could be adversely
affected.
INVESTMENTS IN MORTGAGES. Since the Shurgard REIT operates primarily as an
equity REIT, it does not use significant portions of its available capital to
acquire or make mortgage loans. Under its By-Laws, the Shurgard REIT is,
however, authorized to invest up to 25% of its total assets in mortgage loans if
the debts are secured by liens on self-storage facilities or office and business
parks. To date, the Shurgard REIT has committed $13 million to mortgage loans.
To the extent of its investments in mortgage loans, the Shurgard REIT is subject
to the risks of such investments, which include the risk that borrowers may not
be able to make mortgage service payments or pay principal when due, the risk
that the value of the mortgaged property may be less than the amounts due, and
the risk that interest rates payable on the mortgage may be lower than the
Shurgard REIT's cost of funds. If any of the above were to occur, funds from
operations and the Shurgard REIT's ability to make expected distributions to
shareholders could be adversely affected.
19
<PAGE>
INVESTMENTS IN OTHER COMMERCIAL REAL ESTATE. Although the Shurgard REIT
invests primarily in self-storage facilities and business and office parks, it
may also invest in other commercial real estate if such investments are
specifically approved by the Shurgard REIT Board. The Shurgard REIT has no
present plans to make any such investments. The authority of the Shurgard REIT
Board to make such investments permits the Shurgard REIT flexibility in
selecting appropriate investments, and in adjusting to changes in the
marketplace, without requiring amendments to its By-Laws or specific shareholder
approval. Investments in other forms of real estate, if they were to occur, will
be subject to the risks unique to such investments and, in particular, the
Shurgard REIT must ensure that such investments are managed by persons having
the experience and expertise necessary for the effective management and
operation of those investments. Unfamiliarity with local laws, procedures and
practices, or in the operation of such other investments, might adversely affect
the Shurgard REIT's funds from operations and its ability to make expected
distributions to shareholders.
INDIRECT INVESTMENTS. The Shurgard REIT may invest in real estate by
acquiring equity interests in limited partnerships, partnerships, joint
ventures, trusts or other legal entities that in turn have invested in real
estate constituting appropriate investments for the Shurgard REIT. Under its By-
Laws, a number of conditions must be satisfied before such investments are
permitted, including, among others, the requirement that the joint investment
does not jeopardize the Shurgard REIT's eligibility to be taxed as a REIT or
result in the Shurgard REIT's becoming an investment company under the
Investment Company Act of 1940, as amended. If the Shurgard REIT makes such
investments, these investments will expose the Shurgard REIT to certain risks
not present had the Shurgard REIT invested directly in the real estate. These
risks include, among others, the risk that the Shurgard REIT may not have
control over the legal entity which has title to the real estate, the
possibility that the Shurgard REIT may invest in an enterprise that has
liabilities that are not disclosed at the time of the investment, and the
possibility that the Shurgard REIT's investments would be illiquid and not
readily accepted as collateral by the Shurgard REIT's lenders. Each of these
risks might reduce the Shurgard REIT's cash flow, or impair its ability to
borrow funds, which ultimately could adversely affect the ability of the
Shurgard REIT to meet debt service obligations and make expected distributions
to shareholders.
COMPETITION. The Shurgard REIT faces competition in the acquisition and
management of its real estate. The Shurgard REIT's competitors include other
businesses, individuals, financial institutions, private and public pension
funds and others engaged in real estate investment, some of which may have far
greater financial resources than the Shurgard REIT. Such competition may
adversely affect the occupancy levels at and the rental revenues of the Shurgard
REIT's properties, which could adversely affect the Shurgard REIT's funds from
operations and its ability to meet debt service obligations and make expected
distributions to shareholders.
UNINSURED LOSSES. The Shurgard REIT carries comprehensive liability, fire,
flood, earthquake, extended coverage and rental loss insurance with respect to
its properties with policy specification and insured limits customarily carried
for similar properties. There are, however, certain types of losses (such as
from environmental liabilities and wars) that are either uninsurable or not
economically insurable. Should an uninsured loss occur, the Shurgard REIT could
lose both its capital invested in and its anticipated profits from one or more
of its properties.
LIMITED ASSET DIVERSIFICATION. The Shurgard REIT intends to limit its
investments primarily to self-storage facilities. The success of an investment
in the Shurgard REIT will depend in large measure upon the profitability of such
businesses and real estate investments. The Shurgard REIT is not expected to
have substantial interests in other real estate investments to hedge against the
risk that national trends might adversely affect the profitability of
self-storage facilities. Should this development occur, this would adversely
affect the Shurgard REIT's ability to meet debt service obligations and make
expected distributions to shareholders.
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS. Under various
federal, state and local laws, ordinances and regulations, an owner or operator
of real property may become liable for the costs of
20
<PAGE>
removal or remediation of certain hazardous substances released on or in its
property. Such laws often impose liability without regard to whether the owner
or operator knew of, or was responsible for, the release of such hazardous
substances. The presence of hazardous substances may adversely affect the
owner's ability to sell such real estate or to borrow using such real estate as
collateral.
COST OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND FIRE AND SAFETY
REGULATIONS. All of the Shurgard REIT's properties are required to comply with
the Americans with Disabilities Act, and the regulations, rules and orders that
may be issued thereunder (the "ADA"). The ADA has separate compliance
requirements for "public accommodations" and "commercial facilities," but
generally requires that buildings be made accessible to persons with
disabilities. Compliance with ADA requirements could require removal of access
barriers and noncompliance could result in the imposition of fines by the U.S.
government or an award of damages to private litigants. In addition, the
Shurgard REIT is required to operate its properties in compliance with fire and
safety regulations, building codes, and other land use regulations, as they may
be adopted by governmental agencies and bodies and become applicable to the
Shurgard REIT's properties. Compliance with such requirements may require the
Shurgard REIT to make substantial capital expenditures, which expenditures would
reduce the funds otherwise available for distribution to shareholders.
OTHER GENERAL RISKS
DEPENDENCE ON KEY PERSONNEL. The Shurgard REIT is dependent on the efforts
of its directors and executive officers. See "MANAGEMENT OF THE SHURGARD REIT."
The loss of the services of its key employees could have an adverse effect on
the Shurgard REIT's operations. There can be no assurance that the Shurgard REIT
would be able to recruit additional personnel with equivalent experience in the
self-storage industry.
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHURGARD CLASS A COMMON
STOCK. One of the factors that influences the price of the Shurgard Class A
Common Stock in public trading markets is the annual yield from distributions by
the Shurgard REIT on the price paid for the Shurgard Class A Common Stock as
compared to yields on other financial instruments. Thus, an increase in market
interest rates will result in higher yields on other financial instruments,
which could adversely affect the market price of the Shurgard Class A Common
Stock.
21
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of shares of
Shurgard Class A Common Stock in connection with the solicitation of proxies by
the Shurgard REIT Board for use at the Special Meeting to be held on Tuesday,
March 21, 1995, at the Washington State Convention and Trade Center, 800
Convention Place, Room 204, Seattle, Washington, commencing at 10:00 a.m., local
time, and at any adjournments or postponements thereof. This Proxy
Statement/Prospectus and the accompanying form of proxy are first being mailed
to holders of shares of Shurgard Class A Common Stock on or about February 17,
1995.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, holders of record of shares of Shurgard Class A
Common Stock as of the close of business on January 20, 1995, will consider and
vote upon (i) a proposal to approve the Merger of the Management Company with
and into the Shurgard REIT pursuant to the Merger Agreement and (ii) such other
business as may properly come before the Special Meeting or any adjournments or
postponements thereof. Holders of shares of Shurgard Class A Common Stock will
not be entitled to dissenters' rights as a result of the Merger.
The Merger Agreement provides that, upon the terms and subject to the
conditions thereof, the Management Company will merge with and into the Shurgard
REIT, and the outstanding shares of Management Company Common Stock will be
converted into an aggregate of 1,400,000 shares of Shurgard Class A Common
Stock, subject to certain adjustments based on the market price of the Shurgard
Class A Common Stock and changes to the Management Company's equity from October
31, 1994 to the Closing Date, and certain adjustments for Management Company
shareholders exercising dissenters' rights. In addition, pursuant to the Merger
Agreement, Management Company shareholders will be entitled to receive
additional shares of Shurgard Class A Common Stock based on (i) the extent to
which, during the five years following the Closing, the Shurgard REIT realizes
value as a result of certain transactions relating to interests in or assets of
six limited partnerships acquired by the Shurgard REIT in the Merger and (ii)
the value, at the end of five years or in the event of a change of control, of
any remaining interests in such partnerships as determined by independent
appraisal.
THE SHURGARD REIT BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER
AGREEMENT AND RECOMMENDS THAT THE SHURGARD REIT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE MERGER. See "BACKGROUND OF AND REASONS FOR THE MERGER."
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on January 20, 1995 (the "Record Date") has been fixed
as the record date for determining the holders of shares of Shurgard Class A
Common Stock who are entitled to notice of and to vote at the Special Meeting.
As of the Record Date, there were 16,829,283 shares of Shurgard Class A Common
Stock outstanding and entitled to vote. The holders of record on the Record Date
of shares of Shurgard Class A Common Stock are entitled to one vote per share of
Shurgard Class A Common Stock. The presence in person or by proxy of the holders
of shares representing a majority of the outstanding shares of Shurgard Class A
Common Stock entitled to vote is necessary to constitute a quorum for the
transaction of business at the Special Meeting. As of the Record Date, current
directors and executive officers of the Shurgard REIT and their affiliates
beneficially owned less than 1% of the outstanding shares of Shurgard Class A
Common Stock.
The affirmative vote of the holders of shares representing a majority of the
outstanding shares of Shurgard Class A Common Stock entitled to vote at the
Special Meeting is required to approve the Merger. Abstention from voting and
broker nonvotes will have the practical effect of voting against the Merger
since they are not votes in favor of the Merger.
The Merger is being submitted to holders of shares of Shurgard Class A
Common Stock for approval in accordance with Article 16 of the Shurgard REIT's
Certificate of Incorporation. Such section requires the Merger to be approved
only by the holders of shares of Class A Common Stock
22
<PAGE>
(which is referred to in this Proxy Statement/Prospectus as Shurgard Class A
Common Stock). Accordingly, holders of shares of Shurgard Class B Common Stock
are not entitled to vote at the Special Meeting.
PROXIES; PROXY SOLICITATION
Shares of Shurgard Class A Common Stock represented by properly executed
proxies received at or prior to the Special Meeting that have not been revoked
will be voted at the Special Meeting in accordance with the instructions
contained therein. Shares of Shurgard Class A Common Stock represented by
properly executed proxies for which no instruction is given will be voted "FOR"
approval of the Merger. Shurgard REIT shareholders are requested to complete,
sign, date and promptly return the enclosed proxy card in the postage-prepaid
envelope provided for this purpose to ensure that their shares are voted. A
shareholder may revoke a proxy by submitting at any time prior to the vote on
the Merger a later-dated proxy with respect to the same shares, by delivering a
written notice of revocation to the Secretary of the Shurgard REIT at any time
prior to such vote or by attending the Special Meeting and voting in person.
Mere attendance at the Special Meeting will not in and of itself revoke a proxy.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Special Meeting (except for any proxies that have theretofore effectively
been revoked or withdrawn), notwithstanding that they may have been effectively
voted on the same or any other matter at a previous meeting.
The Shurgard REIT will bear the cost of soliciting proxies from its
shareholders. The Shurgard REIT will pay D.F. King & Co., Inc. ("D.F. King") a
fee of $75,000 to cover its services in soliciting the forwarding and return of
proxy material, exclusive of certain additional fees for related services
performed by D.F. King. In addition, the Shurgard REIT will reimburse D.F. King
for out-of-pocket expenses incurred in connection therewith. In addition to
solicitation by mail, directors, officers and employees of the Shurgard REIT may
solicit proxies by telephone, telegram or otherwise. Such directors, officers
and employees of the Shurgard REIT will not be additionally compensated for such
solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. Brokerage firms, fiduciaries and other custodians who
forward soliciting material to the beneficial owners of shares of Shurgard Class
A Common Stock held of record by them will be reimbursed for their reasonable
expenses incurred in forwarding such material.
23
<PAGE>
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND
On March 1, 1994, the Shurgard REIT completed the acquisition of 17 publicly
held limited partnerships administered by the Management Company as a means of
assembling an initial portfolio of real estate investments (the
"Consolidation"). The Management Company and the general partners of the
partnerships included in the Consolidation initially intended for the Shurgard
REIT to be operated as a self-administered and self-managed REIT, which they
planned to accomplish by merging the Management Company with the Shurgard REIT
concurrently with the Consolidation. This proposed feature of the Consolidation
was, however, eliminated when, during the initial review of the Shurgard REIT's
registration statement, the California Department of Corporations opposed the
merger on the grounds that it was prohibited by California's recently enacted
statute regulating partnership roll-ups. Although the California Department of
Corporations reversed its position prior to the completion of the Consolidation,
the Shurgard REIT decided not to restructure its proposal in view of the
expected costs and delays of obtaining regulatory clearance for a restructured
consolidation program. The Shurgard REIT did agree, however, to provide in its
Certificate of Incorporation that it would not acquire substantially all the
assets of or merge with the Management Company without obtaining the approval of
shareholders holding a majority of the outstanding shares of Shurgard Class A
Common Stock.
In connection with the Consolidation, several class action lawsuits were
filed against various parties involved in the Consolidation, including the
Shurgard REIT and the Management Company. These class action lawsuits were
settled pursuant to a Stipulation of Settlement (the "Settlement") among the
parties involved in the lawsuits. Under the terms of the Settlement, the
Shurgard REIT agreed that, if it proposed to merge or consolidate with the
Management Company within three years of the Settlement, it would retain Green
Street Advisors or some other recognized independent expert to provide a
fairness opinion, based on an independent financial analysis, in connection with
such proposed merger or consolidation. In addition, the Settlement requires that
the Shurgard REIT not be obligated to pay any termination fee to the Management
Company in connection with any such merger or consolidation. As described below,
the Special Committee retained Alex. Brown to provide the fairness opinion
required by the Settlement.
Unless otherwise expressly stated, all members of the Special Committee were
present at all meetings involving the Special Committee described below and all
members of the Shurgard REIT Board were present at all meetings of the Shurgard
REIT Board described below.
On March 17, 1994, as part of the special meeting of the Shurgard REIT
Board, one of the independent directors raised the subject of whether, in light
of the potential synergies of a self-managed REIT, it would be appropriate to
explore the possibility of a merger or other business combination with the
Management Company. The directors requested that at the next scheduled Board
meeting counsel lead a discussion regarding the issues unique to the Shurgard
REIT in connection with a possible acquisition.
On April 26, 1994, as part of the regular meeting of the Shurgard REIT
Board, the Board received a preliminary report from Perkins Coie, counsel to the
Shurgard REIT, regarding certain issues for consideration in connection with a
proposed business combination with the Management Company, including the
background of the existing relationship between the Shurgard REIT and the
Management Company, the merger process and certain tax issues. In addition,
counsel to the Shurgard REIT presented a preliminary timetable traditional to
business combinations of this magnitude. After discussion, the Special Committee
of independent directors of the Board, consisting of Dan Kourkoumelis, Donald W.
Lusk and Wendell J. Smith, was formally established to consider the feasibility
of a possible merger transaction between the Shurgard REIT and the Management
Company. The Shurgard REIT Board concluded, however, that before the Special
Committee should begin any formal analysis of a combination with the Management
Company, further assurance from counsel to the Shurgard REIT was required
regarding how the potential merger might affect the Shurgard
24
<PAGE>
REIT's tax status as a REIT. Following the meeting, the Special Committee
appointed independent counsel, Bogle & Gates, to provide advice with respect to
the fiduciary obligations of the Special Committee in examining any potential
acquisition involving related parties. The members of the Special Committee each
received a fee of $6,000 as compensation for their services on the Special
Committee.
On April 28, 1994, the Shurgard REIT issued a press release announcing,
among other things, that its independent directors had formed a committee to
consider the feasibility of the Shurgard REIT becoming a self-administered and
self-managed REIT through the acquisition of the Management Company.
On May 25, 1994, as part of a special meeting of the Shurgard REIT Board,
counsel to the Shurgard REIT outlined certain tax issues that might arise in
connection with a merger of the Shurgard REIT and the Management Company,
including the impact of succeeding to certain forms of income and the effects of
acquiring the accumulated earnings and profits of the Management Company.
Following discussions, the Shurgard REIT Board authorized the Special Committee
to negotiate the terms of any proposed merger transactions (and any alternatives
to such transaction), to consider information regarding the financial condition
and operations of the Shurgard REIT and the Management Company (to the extent
relevant to any proposed merger transaction or any alternative transaction), and
to make recommendations to the Shurgard REIT Board and shareholders with respect
to any proposed transaction. Because of the Management Company's long history
with the Shurgard REIT and the prior discussion of a possible combination of the
Management Company and the Shurgard REIT in connection with the Consolidation,
the Special Committee did not investigate other potential acquisition targets.
Rather, the Special Committee focused its efforts on the merger transaction
proposed by the Management Company, actively negotiating both price and
structure, so that the resulting transaction would be in the best interests of
the Shurgard REIT and its shareholders. In the absence of acceptable terms, the
alternative would be that the Shurgard REIT remain an externally managed REIT.
On June 9, 1994, the Special Committee, along with independent counsel,
interviewed representatives of Alex. Brown, Green Street Advisors and other
nationally recognized financial advisors in order to determine which of such
firms (or others) might be appropriate, given the circumstances, to assist the
Special Committee with an analysis of an appropriate value for the Management
Company. After deliberation regarding which of such advisors might best provide
valuable service to the Special Committee, given the context of the transaction
and considering, among other matters, the fiduciary obligations of the Special
Committee, fees and expenses, the interested or disinterested nature of those
firms interviewed and other issues, the Special Committee contacted Alex. Brown
to determine whether it would act at financial advisor to the Special Committee
in connection with a potential merger.
On July 27, 1994, Charles K. Barbo, President, Chief Executive Officer and
Chairman of the Board of the Management Company, together with other senior
officers of the Management Company and representatives of the Management
Company's financial advisor, met with the Special Committee to outline the terms
and conditions on which the owners of the Management Company would be prepared
to merge the Management Company with and into the Shurgard REIT. Such
presentation included a report and proposal for the Management Company prepared
for such purpose by Nomura Securities Inc., who had been retained by the
Management Company to act as financial advisor to the Management Company in
connection with the proposed merger transaction. The proposal included a
suggested market value of $34,800,000, prior to certain balance sheet
adjustments. Mr. Barbo, however, believed that at this price the transaction
would be dilutive on a prospective basis to the Shurgard REIT shareholders and
as a result he suggested a price of $32,250,000, prior to certain balance sheet
adjustments, which he believed would not be dilutive to the Shurgard REIT
shareholders (resulting in the issuance of approximately 1,500,000 shares of
Shurgard Class A Common Stock). Under the terms proposed, the merger would
include all of the Management Company's tangible and
25
<PAGE>
intangible assets, except shares of the Shurgard REIT owned by the Management
Company and those assets related to the Management Company's investment in
InterMation that would be spun off, together with related earning and profits,
to the Management Company's existing shareholders.
On July 28, 1994, as part of the regular meeting of the Shurgard REIT Board,
the Board authorized the Special Committee to retain, at the Shurgard REIT's
expense, advisors (including attorneys, investment bankers, and other experts or
agents) in order further to explore a proposed merger of the Shurgard REIT and
the Management Company. Later that day, the Special Committee formally engaged
Alex. Brown to provide its opinion as to the fairness, from a financial point of
view, of the consideration payable by the Shurgard REIT in connection with the
proposed merger.
On July 29, 1994, the Special Committee, along with independent counsel,
spoke with representatives of Alex. Brown regarding the scope of the due
diligence inquiry, financial analysis and related matters to be performed by
Alex. Brown and the procedures and anticipated timetable of such activities.
On August 12, 1994, representatives of Alex. Brown spoke with Mr.
Kourkoumelis, on behalf of the Special Committee, and independent counsel
regarding the status of their investigation, the sufficiency of data received
and their preliminary thoughts with respect to the valuation of the Management
Company underlying the proposal presented by the Management Company's management
on July 27.
On September 9, 1994, Messrs. Lusk and Smith, on behalf of the Special
Committee, along with independent counsel, again spoke with representatives of
Alex. Brown, who reviewed with the Special Committee the various methodologies
to be employed thereby to evaluate the proposed transaction, including a
discounted cash flow analysis, an analysis of selected publicly traded real
estate companies and an analysis of selected real estate company transactions.
In addition, representatives of Alex. Brown spoke with the Special Committee
concerning the business and prospects of the Shurgard REIT after the completion
of the Merger. During such conversation, representatives of Alex. Brown also
discussed the concept of dilution to the existing shareholders of the Shurgard
REIT, noting that consideration in the form of shares of Shurgard Class A Common
Stock had been requested by the Management Company's management. In their
discussion, the Alex. Brown representatives stressed the importance of a
nondilutive transaction and made certain observations regarding a range of
values for the Management Company. Concepts such as an earn-out with respect to
the earnings realized from certain assets and appropriate closing adjustments to
a purchase price were discussed.
On October 13, 1994, representatives of Alex. Brown made a formal
presentation to the Special Committee. At such meeting, members of the Special
Committee, together with the Special Committee's legal and financial advisors,
reviewed, among other things, the background of the proposed merger, the
strategic rationale for the proposed merger, a summary of due diligence
findings, and financial and valuation analyses of the transaction.
Representatives of Alex. Brown noted that as part of Alex. Brown's engagement it
had reviewed, among other data, publicly available financial information
concerning the Shurgard REIT, certain internal financial information provided by
the Shurgard REIT and the Management Company and certain historical and
projected financial data provided by the parties, visited certain self-storage
centers managed by the Management Company, reviewed the price and trading volume
of the Shurgard Class A Common Stock, reviewed certain information regarding
select public companies engaged in the real estate management industry and
reviewed the financial terms of certain business combinations involving real
estate companies.
As part of the discussion, members of the Special Committee and Alex. Brown
commented on the potential synergies to be enjoyed by the Shurgard REIT as a
result of the proposed merger, including the opportunity to acquire a
high-quality, experienced management team; internalize the successful capital
markets expertise of the Management Company's management; realize certain
efficiencies arising from self-managed structures; align the interest of the
Management Company's management
26
<PAGE>
and the Shurgard REIT shareholders; enable the Shurgard REIT to capitalize on
the Management Company's name, goodwill and other intangible assets; and enjoy
enhanced market perception as a self-administered and self-managed REIT.
As part of its presentation, representatives of Alex. Brown described the
various valuation methodologies employed, including (i) a discounted cash flow
analysis using net income, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), and funds from operations, (ii) a comparison of the
proposed transaction with certain transactions in the marketplace (taking into
account selected publicly traded real estate companies), and (iii) suitable
multiples derived from selected real estate company transactions. Based on this
meeting, the Special Committee, with further input from Alex. Brown, concluded
that the overall transaction must not only be nondilutive to the Shurgard REIT
shareholders but, to the extent possible, accretive in some measure, that the
offer should be framed in terms of a fixed number of shares, subject to certain
adjustments, and that certain partnership interests currently held by the
Management Company should be the subject of an earn-out whereby further shares
of Shurgard Class A Common Stock may be earned based upon the profit realized
upon disposition of such interests or the underlying assets. Additional terms of
the initial offer were discussed by the Special Committee in conference with
counsel.
On October 14, 1994, the Special Committee met with Mr. Barbo, on behalf of
the Management Company, to present the initial terms of the proposed merger,
which included a price of $28,000,000, payable in shares of Shurgard Class A
Common Stock, as well as the possibility of additional shares of Shurgard Class
A Common Stock being paid as described above, a portion of the former subject to
an indemnification escrow against certain contingent liabilities. The Special
Committee spoke later that day with independent counsel to discuss Mr. Barbo's
reaction to the offer, as proposed. As there were further legal, tax and
financial issues to explore, the Special Committee requested Alex. Brown to
consider several additional factors and requested from counsel to the Shurgard
REIT further information regarding the impact to the Shurgard REIT from a tax
standpoint of the earnings and profits of the Management Company that would be
acquired by the Shurgard REIT in the proposed merger.
On October 18, 1994, the members of the Special Committee, independent
counsel, and representatives of Alex. Brown received a preliminary report from
counsel to the Shurgard REIT regarding the legal and tax implications of the
earnings and profits to be acquired by the Shurgard REIT as a result of the
proposed acquisition of the Management Company. As there were still several
pieces of information outstanding that prevented reasonable quantification of
the tax impact to the Shurgard REIT of the proposed transaction, the Special
Committee requested that counsel to the Shurgard REIT continue to refine its
report regarding same until such time as the impact, if any, of these tax issues
on the negotiations could be assessed.
On November 21, 1994, the Special Committee met with independent counsel to
review the terms of the outstanding offer and the matters outstanding for
resolution and to receive the report of counsel to the Shurgard REIT regarding
the impact to the Shurgard REIT of the accumulated earnings and profits to be
acquired by the Shurgard REIT in connection with the proposed merger.
On November 22, 1994, representatives of Alex. Brown spoke with the Special
Committee and independent counsel regarding their revised findings, based in
part on the resolution of the impact of the earnings and profits tax issue, as
well as developments with respect to the results of operations and prospects of
the Shurgard REIT, the Management Company and the marketplace generally. During
this meeting, representatives of Alex. Brown discussed with the Special
Committee certain refinements to the offer, as proposed, including the
appropriateness of requiring certain adjustments to the purchase price based on
changes to Management Company equity as of the closing of the proposed merger.
Following the conclusion of such meeting, independent counsel to the Special
Committee met with a representative of the Management Company to communicate the
terms of the revised offer, which included a purchase price of $27,100,000,
assuming and including specified levels
27
<PAGE>
of cash and receivables, the contingent share feature described above, and a 10%
escrow for indemnification, as well as certain closing adjustments to the share
consideration to permit limited appreciation in the stock price, but preserve an
overall transaction value.
On November 23, 1994, the Special Committee, independent counsel, members of
the Management Company's management and its counsel met to begin negotiating the
principal terms of the proposed transaction. Following this meeting, Mr.
Kourkoumelis resigned from the Special Committee due to time constraints
resulting from his other business activities. Later that day a preliminary draft
of a merger agreement was circulated to all parties and their advisers. In
addition, the members of the Special Committee met again to discuss several of
the issues remaining to be negotiated.
On November 29, 1994, the Special Committee, independent counsel, members of
the Management Company's management and its counsel again met to negotiate
certain terms of the proposed merger. At this meeting, discussion focused on an
appropriate purchase price and methodology for calculating the share
consideration and suitable closing adjustments to the same. There was neither
resolution as to price nor the appropriate methodology to quantify the same; the
parties therefore concluded discussions pending clarification of certain
financial data.
On December 1, 1994, the Special Committee, independent counsel and
representatives of Alex. Brown spoke regarding certain benchmarks against which
to measure the accretion or dilution resulting from the proposed purchase price,
the statement of assets and liabilities entries and marketplace perceptions
generally.
On December 5, 1994, Mr. Lusk, on behalf of the Special Committee,
independent counsel, members of the Management Company's management and its
counsel again spoke to negotiate certain terms of the proposed merger. The
meeting focused on those issues discussed on November 29, with the Special
Committee presenting its justification for the share consideration offered and
benchmarks for appropriate closing adjustments to the same. As there continued
to be no agreement on either price or the appropriate methodology to quantify
the same, the negotiations concluded for the day.
On December 8, 1994, Mr. Lusk, on behalf of the Special Committee, and Mr.
Barbo, on behalf of the Management Company, met to discuss certain issues
relating to the purchase price. At the conclusion of such meeting, a tentative
agreement had been reached with respect to a $27,100,000 base purchase price,
subject in its entirety to suitable resolution regarding appropriate closing
adjustments, permitted activities prior to the closing of the proposed merger,
and the scope and limitations of the indemnification escrow.
On December 13, 1994, Mr. Lusk, on behalf of the Special Committee, and Mr.
Barbo, on behalf of the Management Company, spoke with respect to the scope and
limitations of the indemnification escrow, tentatively agreeing upon a framework
that balanced the Shurgard REIT's need for redress against certain liabilities
with the Management Company shareholders' interest in liquidity.
On December 16, 1994, the Special Committee, Mr. Kourkoumelis, independent
counsel and representatives of Alex. Brown met to discuss and review the then
terms of the proposed merger. After extensive discussion regarding the mechanics
of the closing adjustments and the matters subject to indemnification by the
Management Company shareholders, the Special Committee concluded that further
negotiations with the Management Company were necessary. Later that day, Mr.
Smith, on behalf of the Special Committee, along with independent counsel and a
representative of Alex. Brown, met with members of the Management Company's
management to explore further the matters referred to above. That same day, Mr.
Barbo, together with other executive officers of the Management Company,
communicated to independent counsel and a representative of Alex. Brown a
proposal that reflected a share consideration of 1,400,000 shares of Shurgard
Class A Common Stock ($26,300,000 based on the 30-day average trading price of
the Shurgard Class A Common Stock), an indemnification provision that included
recovery for potential liability as a result of the InterMation Spin-off and a
$1,500,000 cap to the balance sheet adjustments contemplated.
28
<PAGE>
On December 17, 1994, the Special Committee, Mr. Kourkoumelis, independent
counsel and a representative of Alex. Brown spoke regarding the terms and
financial ramifications of the offer of December 16. During such meeting, the
Special Committee requested that independent counsel pursue clarification of
certain issues regarding the timing of the receipt by the Management Company of
an anticipated tax refund. The meeting was adjourned until December 19.
On December 19, 1994, the Special Committee, Mr. Kourkoumelis, independent
counsel and a representative of Alex. Brown met to review the terms of the
proposed transaction and to receive the report of Alex. Brown regarding the
fairness of such terms, from a financial point of view, to the Shurgard REIT.
Following considerable discussion regarding certain contemplated transactions by
the Management Company, as well as the timing of the receipt of an anticipated
tax refund in the context of the indemnification escrow, the Special Committee
requested independent counsel to negotiate certain additional terms. That same
morning, independent counsel met with representatives of the Management
Company's management to discuss these final issues, as a result of which the
terms of the Merger were settled. On the basis of that resolution,
representatives of Alex. Brown delivered to the Special Committee their opinion
that the consideration to be paid by the Shurgard REIT to the shareholders of
the Management Company pursuant to the Merger Agreement is fair, from a
financial point of view, to the Shurgard REIT, and, as more fully discussed
below, the Special Committee concluded that the transaction was fair to and in
the best interests of the Shurgard REIT and its shareholders and unanimously
recommended the transaction for approval by the Shurgard REIT Board.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE
SHURGARD REIT BOARD
SPECIAL COMMITTEE. The Special Committee has unanimously determined the
Merger to be fair to and in the best interests of the Shurgard REIT and its
shareholders. Accordingly, the Special Committee has unanimously approved the
Merger and recommends that the Shurgard REIT shareholders vote "FOR" approval of
the Merger.
In reaching its conclusion to recommend that the Shurgard REIT Board approve
the Merger Agreement and the Merger and that the shareholders of the Shurgard
REIT approve the Merger, the Special Committee considered, without assigning
relative weights to, the following factors:
(i) the proven expertise and substantial experience of the employees of
the Management Company, who will become employees of the Shurgard REIT
through the Merger, in the development, acquisition and management of self-
storage properties;
(ii) through the Merger, the Shurgard REIT will internalize the
successful capital markets experience of the Management Company;
(iii) the existing conflicts of interest between the Shurgard REIT and
the management of the Management Company, as well as the steps taken (such
as the creation of the Special Committee and the securing of a fairness
opinion from Alex. Brown) to ensure that the Merger would not be affected by
such conflicts;
(iv) the opportunity to eliminate ongoing conflicts of interest between
the Shurgard REIT and the management of the Management Company;
(v) the fact that the Merger will enable the Shurgard REIT to realize
certain efficiencies arising from a self- managed structure in that it will
pay for management and advisory services directly rather than paying a
third-party fee for such services based on a percentage of the dollar value
of the properties managed and acquired, thereby enabling the Shurgard REIT
to both eliminate the profits that were previously being realized by the
Management Company for providing such services and potentially allowing the
Shurgard REIT in the future to expand its property holdings without a
proportionate increase in the cost of managing such properties, which would
have resulted had the properties continued to be managed by an outside
advisor;
29
<PAGE>
(vi) the interests of the Management Company will be aligned with those
of the Shurgard REIT;
(vii) through the Merger, the Shurgard REIT will acquire the "Shurgard"
name and goodwill associated with that name;
(viii) the belief of the Special Committee that the merger with the
Management Company, which will enable the Shurgard REIT to become a
self-managed and self-administered REIT, will make the Shurgard REIT more
attractive to investors and will enable it to enjoy enhanced market
perception;
(ix) the terms and conditions of the Merger Agreement, including the type
and amount of consideration being paid to the Management Company; the
adjustments to the purchase price; and the indemnification escrow, which
will enable the Shurgard REIT to recover damages if certain events occur;
(x) the fact that the consideration paid to the Management Company would
be nondilutive to the Shurgard REIT shareholders as to FFO. For example, FFO
per share for the Shurgard REIT for the nine months ended September 30, 1994
(based on pro forma financial information that gives effect to the
Consolidation as if it had occurred on January 1, 1994) was $1.56. After
giving pro forma effect to the Merger as if it had occurred on January 1,
1994, FFO per share for such period is also $1.56. (The Shurgard REIT's
actual FFO per share since operations commenced on March 1, 1994 through
September 30, 1994 was $1.26.) FFO should not be considered as an
alternative to net income (determined in accordance with GAAP), as an
indication of the Shurgard REIT's financial performance or cash flow from
operating activities (determined in accordance with GAAP), or as a measure
of liquidity, nor is it necessarily indicative of sufficient cash flow to
fund all of the Shurgard REIT's needs;
(xi) the Merger's structure, which will not result in recognition of
income or gain for federal income tax purposes by the Shurgard REIT or the
Management Company; and
(xii) the written opinion of Alex. Brown delivered to the Special
Committee on December 19, 1994 that on such date and based on various
assumptions and considerations, the consideration to be paid by the Shurgard
REIT in the Merger is fair to the Shurgard REIT, from a financial point of
view.
SHURGARD REIT BOARD. The Shurgard REIT Board based its determination that
the Merger is fair to, and in the best interests of, the Shurgard REIT
shareholders primarily on the analyses and conclusions of the Special Committee
(which were adopted by the Shurgard REIT Board as its own), on the arm's-length
negotiations of the Special Committee with representatives of the Management
Company, which resulted in a decrease in a negotiated price significantly below
that proposed by the Management Company, and on the Alex. Brown opinion
delivered to the Special Committee. The Board did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. THE SHURGARD REIT BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS THAT THE SHURGARD REIT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
ALEX. BROWN FAIRNESS OPINION. As a condition to the acquisition of the
Management Company, the Special Committee retained Alex. Brown to act as its
financial advisor and to render its opinion as to the fairness to the Shurgard
REIT, from a financial point of view, of the consideration to be paid by the
Shurgard REIT to the shareholders of the Management Company (the "Fairness
Opinion"). Alex. Brown assisted in the Special Committee's discussions and
negotiations with the Management Company leading up to the execution of the
Merger Agreement and in the consideration by the Special Committee of the
Merger. At a meeting of the Shurgard REIT Board held on December 19, 1994, Alex.
Brown delivered a written opinion to the Special Committee to the effect that,
as of the date of delivery
30
<PAGE>
of the opinion, the consideration payable by the Shurgard REIT to the
shareholders of the Management Company under the Merger Agreement is fair, from
a financial point of view, to the Shurgard REIT.
In arriving at its opinion, Alex. Brown reviewed the Merger Agreement and
certain publicly available financial information and internal financial analyses
concerning the Shurgard REIT and internal financial analyses concerning the
Management Company and held discussions with members of senior management of the
Shurgard REIT and the Management Company regarding the business and prospects of
their respective companies and the business and prospects of the Shurgard REIT
on a post-Merger basis. In addition, Alex. Brown reviewed the reported price and
trading volume of the Shurgard Class A Common Stock, compared certain financial
information of the Management Company with similar information for certain
selected companies engaged in the real estate management industry whose
securities are publicly traded, reviewed the financial terms of selected recent
business combinations, reviewed certain pro forma analyses regarding the
business and prospects of the Shurgard REIT after the completion of the Merger,
visited certain self-storage centers managed by the Management Company and
performed such other studies and analyses as Alex. Brown considered appropriate.
The projections and other prospective financial information provided by the
Management Company to Alex. Brown did not include InterMation, SRA or any
potential appreciation in the Management Company's interests in six limited
partnerships. Alex. Brown assumed the accuracy, completeness and fairness of the
financial and other information on which it relied in rendering its opinion and
did not independently verify such information. Alex. Brown also assumed that the
financial projections supplied to it were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of the Shurgard REIT and the Management Company. In addition, Alex.
Brown did not make an independent evaluation or appraisal of the assets of the
Shurgard REIT or the Management Company, including the Management Company's
interests in six limited partnerships for which its shareholders may receive
Contingent Shares, in connection with its analyses. No limitations were imposed
by the Special Committee on Alex. Brown with respect to the information reviewed
by or the procedures followed by Alex. Brown in rendering its opinion.
A COPY OF THE WRITTEN OPINION OF ALEX. BROWN DATED DECEMBER 19, 1994, WHICH
INCLUDES THE MATTERS CONSIDERED, THE ASSUMPTIONS MADE AND THE LIMITS OF ITS
REVIEW, IS ATTACHED HERETO AS APPENDIX II, AND IS INCORPORATED HEREIN BY
REFERENCE. SHAREHOLDERS ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. ALEX.
BROWN'S OPINION IS DIRECTED ONLY TO THE FAIRNESS TO THE SHURGARD REIT, FROM A
FINANCIAL POINT OF VIEW, OF THE CONSIDERATION PAYABLE BY THE SHURGARD REIT TO
THE SHAREHOLDERS OF THE MANAGEMENT COMPANY UNDER THE MERGER AGREEMENT.
REASONS FOR SELECTION OF ALEX. BROWN. The Shurgard REIT selected Alex.
Brown as its financial advisor on the basis of Alex. Brown's experience and
expertise in transactions similar to the Merger and its familiarity with the
real estate and REIT industries. Since 1985, Alex. Brown has underwritten nearly
$5.0 billion in equity on 75 REIT securities offerings, making it one of the
largest underwriters of equity REITs, and advised on a number of real estate and
REIT merger and acquisition transactions. Alex. Brown is a nationally recognized
investment banking firm that is involved regularly in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings and private placements, and valuations for corporate
and other purposes. Neither Alex. Brown nor any of its affiliates has been
engaged previously to provide investment banking or other financial services for
either the Shurgard REIT or the Management Company.
ALEX. BROWN COMPENSATION. Pursuant to a letter agreement dated July 18,
1994 (the "Engagement Letter"), the Shurgard REIT engaged Alex. Brown to provide
investment banking advice and services in connection with the Special
Committee's review and analysis of a potential business combination with the
Management Company. The Shurgard REIT agreed to pay Alex. Brown (i) a retainer
fee of $100,000 upon execution of the Engagement Letter and (ii) a fee of
$200,000 at the time of delivery of the Fairness Opinion. The Shurgard REIT also
has agreed to reimburse Alex. Brown for
31
<PAGE>
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
incurred by Alex. Brown in carrying out its duties under the Engagement Letter,
and to indemnify Alex. Brown for certain liabilities to which it may be
subjected in connection with its engagement.
ANALYSIS AND CONCLUSIONS. The following is a summary of the material
factors considered and principal financial analyses performed by Alex. Brown in
connection with the preparation of the Fairness Opinion:
In valuing the Management Company, Alex. Brown considered a variety of
valuation methodologies, including a (i) discounted cash flow analysis, (ii)
comparable company analysis, and (iii) comparable transaction analysis. Alex.
Brown also considered the effect of the Merger on the Shurgard REIT's financial
position, including the likely impact on the price of Shurgard Class A Common
Stock, funds from operations per share and the Shurgard REIT's ability to
maintain its current per share dividend rate.
The discounted cash flow approach assumes, as a basic premise, that the
intrinsic value of any business is the current value of the future cash flow
that the business will generate for its owners. To establish a current value
under this approach, future cash flow must be estimated and an appropriate
discount rate must be determined. Alex. Brown used projections and other
information provided by the Management Company to estimate future net income,
EBITDA, and funds from operations (net income, excluding gains or losses from
debt restructuring and sales of property, plus depreciation, amortization and
minority interests, and after adjustment for unconsolidated entities in which
the Management Company holds an interest) for the Management Company for each
year of a 10-year period beginning with 1995, using discount rates ranging from
10% to 20% and terminal value capitalization rates applied to tenth-year
projected net income, EBITDA and funds from operations ranging from 10% to 20%.
Alex. Brown's calculations resulted in the following ranges of values for the
Management Company: based upon a discounted cash flow analysis of the Management
Company's net income, a range of $15.5 million to $37.8 million; based upon a
discounted cash flow analysis of the Management Company's projected EBITDA, a
range of $24.3 million to $58.8 million; and, based upon a discounted cash flow
analysis of the Management Company's projected funds from operations, a range of
$24.3 million to $58.6 million.
Alex. Brown also analyzed selected publicly traded real estate companies
engaged primarily as managers and advisors in the real estate business. Alex.
Brown considered the following companies: Grubb & Ellis Company, Christiana
Companies, Inc. and Insignia Financial Group, Inc. Alex. Brown compared the
market value of each company, as determined by the closing price recorded for
each company's common stock on December 16, 1994, with each company's revenue,
EBITDA and shareholders' equity. Alex. Brown's calculations resulted in the
following ranges of multiples for these companies and the Management Company: a
range of market value to latest twelve months' revenue of 1.5x to 3.2x (with the
Management Company at 2.3x); a range of market value to latest twelve months'
EBITDA of 8.9x to 10.7x (with the Management Company at 7.8x); and, a range of
market value to shareholders' equity of 2.7x to 2.8x (with the Management
Company at 13.8x). In addition, Alex. Brown noted that these companies trade at
multiples of price to estimated 1994 earnings per share and estimated 1995
earnings per share of 28.6x and 14.5x, respectively (with the Management Company
at 15.0x and 12.4x for projected 1994 and 1995 net income, respectively). Alex.
Brown noted that its analysis did not rely heavily on the multiples of price to
estimated earnings per share due to the limited number of estimates available
for certain of these companies. Alex. Brown also noted that its analysis did not
place significant emphasis on the ratios of market value to shareholders' equity
based on its belief that revenue and EBITDA multiples are more relevant
indicators of value for a service company such as the Management Company.
Alex. Brown also compared the proposed acquisition of the Management Company
by the Shurgard REIT with acquisitions by selected public companies engaged
primarily in the real estate management, development and acquisition business.
Under this approach, Alex. Brown considered, among others, the acquisition of
Security Management Corporation and Angeles Corporation by
32
<PAGE>
Insignia Financial Group, Inc., the acquisition of Koll Management Services,
Inc. by an investor group that included certain members of its management, the
acquisition of BT Venture Corporation by Boddie-Noell Properties, Inc. and the
consolidation of Franchise Finance Corporation of America with existing related
real estate limited partnerships. Alex. Brown determined the multiples of sales
price to revenue, net income, EBITDA and shareholders' equity for each of these
companies. Alex. Brown then applied the high, low and average of each of these
multiples to the revenue, net income, EBITDA and shareholders' equity of the
Management Company. Alex. Brown's calculations resulted in the following ranges
and averages of multiples for these companies: a range of sales price to latest
twelve months' revenue of 0.8x to 6.0x, with an average of 2.8x; a range of
sales price to latest twelve months' net income of 8.2x to 24.8x, with an
average of 17.0x; a range of sales price to latest twelve months' EBITDA of 6.7x
to 14.9x, with an average of 10.1x; and, a range of sales price to shareholders'
equity of 1.4x to 17.7x, with an average of 8.9x.
Alex. Brown compared the value of the Share Consideration of $26.3 million
with ranges of values and averages based upon the Management Company's projected
results for 1995 and the foregoing multiples and averages, as follows: based
upon the ratio of sales price to revenue, a range of $9.3 million to $69.9
million, with an average of $32.5 million; based upon the ratio of sales price
to net income, a range of $17.2 million to $52.5 million, with an average of
$35.9 million; based upon the ratio of sales price to EBITDA, a range of $22.5
million to $50.1 million, with an average of $33.9 million; and, based upon the
ratio of sales price to the Management Company's projected 1994 shareholders'
equity, a range of $2.7 million to $33.8 million, with an average of $17.0
million. Alex. Brown also considered other financial characteristics of these
companies.
Alex. Brown deemed it inappropriate to employ the asset value approach in
rendering the Fairness Opinion because services companies, like the Management
Company, are generally valued in terms of the profitability and cash flow of
their operations, not in terms of asset value.
Alex. Brown also reviewed certain acquisitions of real estate advisory and
management companies by publicly traded REITs. This review included calculating
the multiples obtained by comparing the prices paid to acquire such companies
with the advisory fees earned by the acquired companies during the last full
fiscal year prior to the REIT's becoming self-advised and with the funds from
operations and total assets of the acquiring REITs. Under this approach, Alex.
Brown considered Bradley Real Estate Trust, Boddie-Noell Properties, Inc.,
Burnham Pacific Properties, Inc., Meditrust, Real Estate Investment Trust of
California, Health Equity Properties, Incorporated, American Health Properties,
Inc., Nationwide Health Properties, Inc., Health Care Property Investors, Inc.
and BRE Properties, Inc. Alex. Brown also considered other financial and
operating characteristics of these companies.
Alex. Brown's calculations resulted in the following ranges of multiples for
these companies and the Management Company: a range of sales price to
compensation paid to the advisor during the last full fiscal year prior to the
acquisition of .27x to 10.37x (with the Management Company at 2.68x); a range of
sales price to the advised REIT's funds from operations during the last full
fiscal year prior to the acquisition of .13x to .65x (with the Management
Company at .75x); and, a ratio of sales price to the advised REIT's total assets
of .003x to .049x (with the Management Company at .054x). Each of these ratios
excluded transactions between several REITs and their advisors in which the
REITs paid no consideration for the acquisition of their advisors.
Alex. Brown observed that its analysis did not rely heavily on the ratios
derived from the REITs which had acquired their advisors because of several
significant differences between the Management Company and most of the acquired
advisors, including, among others, (i) the fact that the Management Company owns
significant intangible assets, such as the "Shurgard" name and store designs and
systems, which are recognizable by the general public, whereas most of the
advisors are unknown to the general public, (ii) the Management Company receives
approximately one-third of its revenues from parties other than the Shurgard
REIT, whereas most of the advisors received substantially all of their revenues
from their advised REITs, (iii) the Management Company has proven its ability to
33
<PAGE>
access the private capital markets on its own behalf to obtain funds for the
acquisition and development of properties, whereas most of the advisors'
activities were limited to accessing the capital markets through their advised
REITs, and (iv) the Management Company owned a storage center, whereas most of
the advised REITs owned no assets other than office equipment and furniture and
fixtures.
Alex. Brown also considered the earn-out feature of the Merger. Alex. Brown
believed that the earn-out was a reasonable means of mitigating the
uncertainties involved in determining the value, if any, of the Management
Company's interests in six limited partnerships. Under the earn-out, the amount
of any Contingent Shares payable to the Management Company shareholders with
respect to these partnership interests will be determined following (i) the
receipt of proceeds by the Shurgard REIT from the sale or other disposition by
the Shurgard REIT of all or any part of its interests in the partnerships during
the five years following the Closing, (ii) the receipt by the Shurgard REIT of
any distribution from a partnership attributable to the sale, refinancing,
liquidation or other disposition by a partnership of one or more of its
properties during the five years following the Closing, or (iii) a deemed
liquidating distribution from a partnership to the Shurgard REIT, if and to the
extent any of the partnership interests are not sold at the end of five years
after the Closing. In all such events, the Shurgard REIT will issue Contingent
Shares to the Management Company shareholders in an amount equal to 95% of the
"profits" received in connection with the actual or deemed disposition of such
partnership interests. Prior to their disposition, the Shurgard REIT will
receive any distributions with respect to such partnership interests without
payment of any consideration to the Management Company. Alex. Brown did not,
however, attempt to value these partnership interests either individually or
collectively.
Based on the foregoing, Alex. Brown concluded that, as of the date of the
Fairness Opinion and based on various assumptions and considerations, the
consideration to be paid by the Shurgard REIT to the shareholders of the
Management Company pursuant to the Merger Agreement is fair, from a financial
point of view, to the Shurgard REIT.
The summary set forth above does not purport to be a complete description of
the analyses performed by Alex. Brown in arriving at the Fairness Opinion. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, notwithstanding the
separate factors summarized above, Alex. Brown believes that its analysis must
be considered as a whole and that selecting portions of its analysis and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying the Fairness
Opinion.
34
<PAGE>
SHURGARD STORAGE CENTERS, INC.
BUSINESS
GENERAL. The Shurgard REIT was formed through the consolidation on March 1,
1994 of 17 publicly held real estate limited partnerships (the "Consolidation")
that had been sponsored by the Management Company. The Shurgard REIT is one of
the largest operators of self-storage properties in the United States. It now
owns directly and through joint ventures 159 self-storage properties, containing
approximately 10.8 million net rentable square feet, located in 21 major
metropolitan areas in 18 states. The Shurgard REIT's self-storage properties
offer low-cost, easily accessible storage space for personal and business uses.
In addition, the Shurgard REIT owns two business parks. As of September 30,
1994, the Shurgard REIT's self-storage properties had a weighted average
occupancy of 90% and a weighted average annual rent per square foot of $8.51.
The Shurgard REIT's self-storage properties are currently managed by the
Management Company and are operated under the "Shurgard" name, which is owned by
the Management Company. The Management Company performs all real estate
acquisition, design and development and oversees the operations of the Shurgard
REIT's self-storage centers. Additionally, the Management Company performs
various administrative services, including legal, financial, accounting,
marketing and human resources. See "SHURGARD INCORPORATED -- Relationship With
the Shurgard REIT." Upon the consummation of the Merger, the Shurgard REIT will
become a self-administered and self-managed REIT.
The Shurgard REIT seeks to maximize shareholder value by increasing funds
from operations through internal growth and through the acquisition and
development of additional self-storage properties, as well as other real estate
investments. The Shurgard REIT believes that its access to capital markets, the
experience of its management team in acquiring and developing self-storage
properties, its geographic diversification and its emphasis on quality will
enhance its ability to achieve this objective.
The Shurgard REIT's strategy for internal growth is to increase rental rates
while maintaining strong occupancy levels, provide high-quality facilities,
achieve high levels of customer satisfaction, and employ skilled facility
managers who have the ability to operate the properties with considerable
autonomy. The Shurgard REIT's external growth strategy is designed to capitalize
on the current fragmentation in the self-storage industry through acquisition
and development of facilities in appropriate markets. In particular, the
Shurgard REIT seeks to acquire or develop high-quality properties concentrated
in its existing markets and in new markets that fit well within its current
network.
The Shurgard REIT expects to fund future acquisitions through the incurrence
of additional indebtedness, future offerings of its debt and equity securities
and retained cash flow. As of September 30, 1994, the Shurgard REIT had a debt
to total market capitalization ratio of 30%.
RECENT DEVELOPMENTS. On September 1, 1994, the Shurgard REIT completed the
purchase of 20 properties from Colonial Self Storage. The new properties
acquired by the Shurgard REIT were 98% occupied with average rent per square
foot of $7.34 as of June 30, 1994. These properties are located in the
Washington D.C. metropolitan area; Raleigh, North Carolina; Richmond, Virginia;
Virginia Beach, Virginia; and Charlottesville, Virginia. In the aggregate, these
properties represent 732,312 total square feet.
On April 9, 1993, the Management Company entered into an agreement with
Freeman Management Corporation ("FMC"), a property development company located
in Nashville, Tennessee, pursuant to which the Management Company (or its
assignee) and FMC agreed to jointly acquire or develop self-storage facilities
in Tennessee and Kentucky. To date, the Shurgard REIT (as assignee of the
Management Company) has entered into three joint venture agreements with
partnerships affiliated with FMC to develop three self-storage facilities in the
Nashville area. The Shurgard REIT owns a
35
<PAGE>
67% interest in the first joint venture, a 50% interest in the second joint
venture and a 91.2% interest in the third joint venture. Development of each of
the facilities is expected to be substantially completed in 1995, and they will
have an aggregate of approximately 162,000 net rentable square feet.
On August 26, 1994, the Shurgard REIT entered into a commitment with a major
financial services company to provide an additional two-year $50 million
revolving credit facility. This credit facility, which closed in December 1994,
will be used to fund the acquisition and development of self-storage properties.
On October 21, 1994, the Shurgard REIT entered into a commitment to invest
up to $3 million in a Belgian societe en commandite simple (an entity similar to
a limited partnership) ("Benelux SCS") that will own and operate self-storage
facilities in the Benelux region of Europe. The Shurgard REIT expects to make
such investment prior to the Closing. The Shurgard REIT's interests in Benelux
SCS are similar to that of general and limited partnership interests. The
Management Company has made a $250,000 working capital loan to, and holds an
interest in, Benelux SCS similar to that of a limited partner. The Management
Company has committed to lend an additional $500,000 to Benelux SCS. Such loans
are in addition to the Shurgard REIT's commitment to invest up to $3 million in
Benelux SCS, described above. In the Merger, the Shurgard REIT will acquire the
Management Company's limited partner interest in Benelux SCS. See "--
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On October 27, 1994, the Shurgard REIT entered into two participating loan
agreements with William B. Wrench ("Wrench") and partnerships of which Wrench
serves as the managing general partner pursuant to which the Shurgard REIT
agreed to advance nonrecourse loans to be secured by self-storage facilities
located in the Fairfax, Virginia area and managed by the Management Company. The
loans, totaling $12,000,000, were advanced on December 14, 1994 and are secured
by four self-storage facilities containing a total of approximately 206,700
square feet of net rentable storage space and approximately 28,300 square feet
of net rentable office/warehouse space. The Shurgard REIT also agreed to
advance, under certain conditions, up to an additional $1,000,000 to fund the
future construction of additional improvements at one of the facilities. The two
loans bear interest at 8% per annum during their 10-year terms, plus additional
interest from cash flow and gain at maturity. In addition, the Shurgard REIT has
been granted options to acquire each of the properties at established purchase
prices, which options generally become exercisable in five years and extend for
the balance of the original loan terms. The Management Company (or the Shurgard
REIT as its successor) will continue to manage the four properties during the
terms of the loans.
INDUSTRY BACKGROUND. The self-storage industry initially developed in the
early 1960s in the southwestern portion of the United States. These facilities
were developed in response to the growing need for low-cost accessible storage.
A number of factors accelerated the demand for low-cost storage including, among
others, a more mobile society, with individuals moving to new homes and new
cities needing short-term storage for their belongings, the increasing cost of
residential housing (with the result that houses were becoming smaller), the
increased popularity of apartments and condominiums, more individuals with
growing discretionary income (resulting in the purchase of items such as boats
and recreational vehicles that cannot be stored at residences), the growing
number of small businesses and the escalating cost of other storage
alternatives. As the demand for such storage increased, and the acceptance of
self-storage became more widespread, self-storage facilities were built
throughout the United States. Generally, such facilities were constructed along
major thoroughfares that provided ready access and public visibility or in
outlying areas where land was inexpensive. In certain areas of the country,
where new construction was impractical because of construction costs, lack of
suitable sites or other restrictions, older structures have been converted into
self-storage facilities.
The self-storage industry is highly fragmented, with facilities owned and
operated by individuals, small businesses, institutional investors, REITs and
syndicated partnerships. Based on information reported in the Self-Storage
Almanac for 1994, the Shurgard REIT estimates that there are in excess
36
<PAGE>
of 22,000 facilities throughout the United States. It is anticipated that the
demand for self-storage will continue to expand in view of existing high
construction costs and the continuing need for low-cost storage. It is expected,
however, that the competition will increase as the self-storage industry
expands. See "-- Competition."
DESCRIPTION AND USE OF PROPERTIES. The Shurgard REIT owns directly and
through joint ventures 159 self-storage properties located in 21 major
metropolitan areas in 18 states. The Shurgard REIT's self-storage facilities are
designed to offer low-cost accessible storage space for personal and business
use. Individuals usually rent space in self-storage facilities for storage of
furniture, household appliances, personal belongings, motor vehicles, boats,
campers, motorcycles and other household and recreational goods. Businesses
typically use space for storage of inventory, business records, seasonal goods,
equipment and fixtures. The Shurgard REIT estimates that business users rent
approximately 35% to 40% of the space at its properties. The Shurgard REIT's
self-storage facilities are divided into a number of self-enclosed rental units
that generally range in size from 25 to 360 square feet. In addition, many
facilities have uncovered storage outside the buildings for parking motor
vehicles, boats, campers and other similar items suitable for outside storage.
As a general rule, customers have access to their leased space without
additional charge during normal business hours and control access to such space
through the use of padlocks. Approximately 20% of the properties owned by the
Shurgard REIT include climate-controlled storage units.
Self-storage facilities differ from warehouses and other storage facilities
in that the tenants are generally responsible for delivering and retrieving
stored goods. Several facilities also offer truck rentals and inventory sales to
the public. See "POLICIES REGARDING INVESTMENT AND CERTAIN OTHER ACTIVITIES --
Policy with Respect to Dividends and Certain Other Activities -- Ancillary
Services." The leasing, maintenance and operation of the facility are the
responsibility of on-site managers who frequently reside in an apartment located
at the facility. The facility's security is provided through a variety of
systems that may include, among others, on-site personnel, electronic devices
such as intrusion and fire alarms, access controls and video and intercom
surveillance devices, facility fencing and lighting.
Most self-storage facilities consist of one or more single-story buildings
that are located on a site of 1 1/2 to five acres, depending on the size of the
facility. The facilities frequently are constructed with concrete block or
tilt-up concrete panels, with steel columns or precast concrete columns that
rest on concrete footings and slabs and have built-up tar roofs or pitched truss
roofs with shingles or standing seam metal roofs. The interior walls are
generally constructed with metal studs and partitions or other construction
materials that are secure but readily movable. Access to the storage units is
usually provided through roll-up or swing doors. The parking areas and driveways
are generally paved with asphalt, cement or other similar materials. Most
facilities have fencing, floodlights, sliding or swinging gates and certain of
the security devices mentioned above.
In some cases, multistory buildings able to bear substantial weight loads,
such as warehouses and newspaper plants, have been converted into self-storage
facilities. In addition, similar multistory buildings for self-storage have been
constructed in dense urban areas where land costs, zoning and other development
considerations make it impractical or undesirable to construct single-story
buildings.
Generally, tenants can access leased space directly by automobile, truck or
other delivery device, but some facilities, in particular the multistory
buildings, have separate loading docks and elevators available for delivery and
retrieval of stored goods.
37
<PAGE>
The following table provides information regarding the year acquired (by the
Shurgard REIT or by one of the partnerships included in the Consolidation, as
the case may be), year built, approximate net rentable square feet and acreage
of each of the self-storage properties and business parks owned by the Shurgard
REIT.
<TABLE>
<CAPTION>
PREVIOUS
SHURGARD APPROXIMATE
PARTNERSHIP YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION OWNER ACQUIRED YEAR BUILT SQUARE FEET ACREAGE
- ----------------------- ----------------------- ----------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kalamazoo Kalamazoo, MI 1 1980 1980 42,695 3.0
Vancouver Mall (1) Vancouver, WA 1 1980 1982 45,900 3.3
West Seattle (1) Seattle, WA 1 1980 1981 47,500 3.4
Bellingham Bellingham, WA 1 1981 1981 73,238 5.7
Everett (2) Everett, WA 1 1981 1978 63,720 4.2
Highland Hill Tacoma, WA 2 1981 1982 59,675 3.9
Troy East (1) Troy, MI 1 1981 1975/77 79,090 4.8
Alsip (1) Alsip, IL 2 1982 1980 66,406 4.6
Dolton (1) Calumet City, IL 2 1982 1979 63,625 3.0
Lombard (1) Lombard, IL 2 1982 1980 52,410 3.1
Rolling Meadows (1) Rolling Meadows, IL 2 1982 1980 60,377 4.5
Schaumburg (1) Schaumburg, IL 2 1982 1980 70,675 4.3
Grand Rapids Grand Rapids, MI 3 1983 1978 45,845 3.2
Lansing (1) Lansing, MI 3 1983 1978/79 40,575 2.5
Salem (1) Salem, OR 3 1983 1979/81 66,915 3.8
Seattle (1) Seattle, WA 4 1983 1979 78,755 4.5
Southfield (1) Southfield, MI 3 1983 1976 76,650 4.3
Troy West (1) Troy, MI 3 1983 1979 87,725 5.2
Bellevue East (1,4) Bellevue, WA 4 1984 1975 164,825 5.6
Bellevue West (1,4) Bellevue, WA 4 1984 1979 5.2
Edmonds (1) Edmonds, WA 5 1984 1974/75 120,190 6.5
Factoria (1) Bellevue, WA 3 1984 1984 57,275 3.8
Federal Way (1) Federal Way, WA 4 1984 1975 134,440 5.7
Fife (3) Tacoma, WA 6 1984 1977 63,554 3.9
North Spokane (1) Spokane, WA 5 1984 1976 75,665 4.1
Renton (1) Renton, WA 4 1984 1979/89 80,190 4.5
Tamarac (1) Denver, CO 5 1984 1977 25,188 1.9
Tempe (2) Tempe, AZ 5 1984 1976 54,469 3.0
Thornton (1) Denver, CO 5 1984 1984 40,821 2.4
Totem Lake (2) Kirkland, WA 5 1984 1978 60,880 2.6
Windermere (1) Littleton, CO 5 1984 1977/79 83,281 5.3
Woodinville (2) Woodinville, WA 6 1984 1982/84 69,875 3.5
Gladstone Gladstone, OR 6 1984/85 1981/89 47,930 3.2
Beaverton (1) Beaverton, OR 7 1985 1974 25,800 2.0
Bedford (3) Bedford, TX 6 1985 1984 69,050 2.7
Bellefontaine St. Louis, MO 7 1985 1979 45,064 4.9
Bridgeview (1) Bridgeview, IL 6 1985 1983 74,540 4.1
Burien (2) Seattle, WA 6 1985 1974 91,876 5.3
Colton (1) Colton, CA 7 1985 1984 73,032 3.8
Hayward (1) Hayward, CA 8 1985 1983 47,720 2.8
Hill Country Village San Antonio, TX 7 1985 1982 79,040 4.0
(1)
Irving (1) Irving, TX 7 1985 1975/84 77,660 4.2
Issaquah (1) Issaquah, WA 7 1985 1986 56,360 4.7
N.W. Houston (1) Houston, TX 7 1985 1979/83 104,447 4.9
Oakland Park (1) Ft. Lauderdale, FL 8 1985 1974/78 292,035 13.4
Phoenix (1) Phoenix, AZ 7 1985 1984 77,397 2.7
Plymouth Canton Township, MI 6 1985 1979 74,990 5.3
San Antonio NE (1) San Antonio, TX 7 1985 1982 73,550 3.6
Scottsdale (1) Scottsdale, AZ 6 1985 1976/85 47,185 3.0
Sea-Tac (2) Seattle, WA 6 1985 1979 60,050 3.0
Southcenter Renton, WA 6 1985 1979 66,975 4.1
Union City (1) Hayward, CA 7 1985 1985 41,931 2.9
Scottsdale North (2) Scottsdale, AZ 6 1985/87 1985 112,065 4.1
Walled Lake (1) Walled Lake, MI 7 1985/89 1984 68,425 4.3
Newport News S. (1) Newport News, VA 18 1985/92 1985 60,180 3.9
Airport Philadelphia, PA 10 1986 1985 101,175 6.7
Arlington (1) Arlington, TX 8 1986 1984 56,525 2.7
Aurora North (1) Seattle, WA 9 1986 1978 57,641 1.6
B Y Gold Brooklyn, NY 10 1986 1940 107,995 0.4
B Y Utica Brooklyn, NY 12 1986 1964 71,009 1.1
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
PREVIOUS
SHURGARD APPROXIMATE
PARTNERSHIP YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION OWNER ACQUIRED YEAR BUILT SQUARE FEET ACREAGE
- ----------------------- ----------------------- ----------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
B Y Van Dam Long Island City, NY 12 1986 1925 63,253 0.5
B Y Yonkers Yonkers, NY 11 1986 1928 101,573 1.6
Chandler (1) Chandler, AZ 8 1986 1986 68,565 4.0
Clinton (1) Clinton, MD 9 1986 1985 30,508 2.0
College Park (3) Indianapolis, IN 9 1986 1984 69,760 6.0
Downtown Seattle (2) Seattle, WA 11 1986 1912 27,617 0.3
East Lynnwood (1) Lynnwood, WA 10 1986 1978 79,760 3.8
El Cajon (2) El Cajon, CA 11 1986 1977 126,998 6.0
El Cerrito Richmond, CA 10 1986 1987 62,033 1.5
Fairfax (1) Fairfax, VA 10 1986 1980 61,730 5.6
Glendale (3) Indianapolis, IN 9 1986 1985 59,950 5.6
Kearney-Balboa (2) San Diego, CA 12 1986 1984 94,007 2.3
La Habra (1) La Habra, CA 9 1986 1979/91 96,930 7.1
Lakewood (3) Golden, CO 10 1986 1985 66,600 2.7
Lisle (2) Lisle, IL 11 1986 1976/86 52,050 3.4
MacArthur Blvd. (1) Irving, TX 9 1986 1984 62,850 7.2
North Austin (1) Austin, TX 8 1986 1982 75,690 5.9
Palo Alto (1) Palo Alto, CA 10 1986 1987 48,915 1.4
Roswell (3) Roswell, GA 12 1986 1986 56,579 3.8
Santa Ana (2) Santa Ana, CA 12 1986 1975/86 168,479 8.1
Seminole (1) Seminole, FL 8 1986 1984/85 61,098 2.7
Sunnyvale Sunnyvale, CA 9 1986 1974/75 122,416 6.5
Thousand Oaks (2) San Antonio, TX 8 1986 1987 53,495 2.9
West Chester West Chester, PA 8 1986 1980 87,071 7.0
Westheimer (1) Houston, TX 8 1986 1977 73,410 3.7
Westwood (2) Santa Monica, CA 11 1986 1988 38,485 0.3
Willowbrook (1) Willowbrook, IL 12 1986 1979/1982 44,325 3.3
B Y Northern Long Island City, NY 11 1987 1940 77,573 1.9
Capitol Hill (6) Seattle, WA 12 1987 1988 76,400 0.7
Cook Road (1) Houston, TX 14 1987 1986 61,150 3.0
Euless Blvd. (1) Hurst, TX 11 1987 1974 67,505 4.7
Falls Church (1) Falls Church, VA 15/17 1987 1988 92,730 1.5
Fontana Sierra (1) Fontana, CA 14 1987 1980/85 84,444 3.6
Fredricksburg (1) San Antonio, TX 11 1987 1978/82 81,535 4.5
Interbay (3) Seattle, WA 15 1987 1988 80,375 0.4
King City (1) Tigard, OR 10 1987 1986 83,575 4.9
Mesa (1) Mesa, AZ 14 1987 1985 102,830 4.8
Military Trail (1) West Palm Beach, FL 14 1987 1981 123,842 9.4
Mountain View (1) Mountain View, CA 16 1987 1986 28,568 0.7
Northglenn (1) Northglenn, CO 6 1987 1979 75,000 5.5
Old Bridge Matawan, NJ 14 1987 1987 77,600 6.1
Olive Innerbelt St. Louis, MO 14 1987 1952/86 93,645 2.5
Phoenix East (1) Phoenix, AZ 14 1987 1984 65,904 2.0
S. San Francisco (1) San Francisco, CA 14 1987 1985 56,594 2.1
Smokey Point (1) Arlington, WA 14 1987 1984/87 33,824 2.2
Solana Beach (2) Solana Beach, CA 14 1987 1984 94,815 4.5
South Tacoma (1) Tacoma, WA 12 1987 1975 46,490 3.1
Suitland Suitland, MD 14 1987 1985 43,543 2.7
West Palm Beach (1) West Palm Beach, FL 16 1987 1975 163,074 11.8
Tacoma Interstate (3) Tacoma, WA 12 1987/88/91 1979/81 127,943 12.2
Ann Arbor Ann Arbor, MI 18 1988 1977 61,725 3.9
Bandera Road (1) San Antonio, TX 16 1988 1981 75,703 3.6
Bayside (3) Virginia Beach, VA 16 1988 1984 28,392 1.7
Blanco Road (1) San Antonio, TX 15 1988 1989/91 65,985 3.6
Brentwood Brentwood, MO 16 1988 1977 52,576 3.4
Canton (5) Canton, MI 18 1988 1986 58,400 3.3
Crofton (1) Gambrills, MD 16 1988 1985 39,823 2.1
Culver City Los Angeles, CA 15/17 1988 1989 76,091 1.4
Federal (1) Houston, TX 12 1988 1988 55,225 3.4
Fraser (5) Fraser, MI 18 1988 1985 73,000 5.2
Herndon (1) Herndon, VA 18 1988 1985 38,630 3.0
Hillside (3) Hillside, IL 17 1988 1988 65,205 5.3
Huntington Beach (2) Huntington Beach, CA 16 1988 1986 90,681 3.3
Imperial Valley (1) Houston, TX 14 1988 1987 54,375 3.1
Kingwood (2) Kingwood, TX 11 1988 1988 53,675 3.3
Laurel (1) Laurel, MD 16 1988 1984 30,222 2.0
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
PREVIOUS
SHURGARD APPROXIMATE
PARTNERSHIP YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION OWNER ACQUIRED YEAR BUILT SQUARE FEET ACREAGE
- ----------------------- ----------------------- ----------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Livonia (5) Livonia, MI 18 1988 1985 67,450 4.8
Manassas East (1) Manassas, VA 16 1988 1984 34,881 2.0
Manassas West (1) Manassas, VA 16 1988 1985 34,960 1.5
North Richmond (1) Richmond, VA 18 1988 1984 37,275 2.6
Portland (1) Portland, OR 15 1988 1988 49,100 2.1
Sugarland (1) Sugarland, TX 18 1988 1987 54,950 3.0
Warren (5) Warren, MI 18 1988 1985 68,225 4.6
Woodlands (1) Houston, TX 16 1988 1988 64,325 3.8
Beltline Rd. (1) Irving, TX 10 1989 1985/86 88,900 6.3
Denny Road (1) Beaverton, OR 17 1989 1988 64,860 6.2
Greenbriar (1) Houston, TX 17 1989 1988 60,362 1.8
Kempsville (1) Virginia Beach, VA 14 1989 1985 32,638 2.0
Medical Center Houston, TX 15/17 1989 1989 57,125 2.6
Virginia Beach Virginia Beach, VA 15 1989 1985 36,470 2.3
Hillcroft (2) Houston, TX 15 1991 1988 59,075 3.4
Briggs Chaney (3) Silver Spring, MD 1994 1987 27,841 2.0
Capital Blvd (3) Raleigh, NC 1994 1984 34,500 2.1
Cary (3) Cary, NC 1994 1984 61,770 4.7
Cedar Road (3) Chesapeake, VA 1994 1989 35,550 2.1
Charlottesville (3) Charlottesville, VA 1994 1984 31,600 2.1
Crater Road (3) Petersburg, VA 1994 1987 36,090 3.8
Dale City (3) Dale City, VA 1994 1986 31,397 1.6
Frederick (3) Frederick, MD 1994 1987 32,418 1.7
Gainesville (3) Gainesville, VA 1994 1988 31,200 2.0
Gaithersburg (3) Gaithersburg, MD 1994 1986 57,164 5.4
Garner (3) Garner, NC 1994 1987 27,900 3.1
Germantown (3) Germantown, MD 1994 1988 44,595 1.9
Glenwood (3) Raleigh, NC 1994 1983 30,960 1.9
Holland Road (3) Virginia Beach, VA 1994 1985 33,650 3.9
Jeff Davis Hwy (3) Richmond, VA 1994 1990 35,075 5.2
Laskin Road (3) Virginia Beach, VA 1994 1984 38,500 2.5
Morrisville (3) Morrisville, NC 1994 1988 40,000 3.3
Oxon Hill (3) Ft. Washington, MD 1994 1987 28,192 1.3
Princess Anne Road (3) Virginia Beach, VA 1994 1985 39,850 2.2
Temple Avenue (3) Petersburg, VA 1994 1989 34,060 4.0
<FN>
- ------------------------------
(1) Properties secure a loan from Nomura Asset Capital Corp., a subsidiary of
Nomura Securities International, Inc., entered into in June 1994.
(2) Properties secure a line of credit from Seattle-First National Bank entered
into in August 1994.
(3) Properties secure a line of credit from Nomura Asset Capital Corp. entered
into in December 1994.
(4) Bellevue West and Bellevue East are operated as one facility. Their
aggregate net rentable square feet is 164,825.
(5) The Shurgard REIT owns a 30% interest in this property.
(6) The Shurgard REIT owns a 90% interest in this property.
</TABLE>
40
<PAGE>
The following table sets forth information regarding average occupancy and
average annual revenue per square foot for the properties owned by each of the
17 partnerships included in the Consolidation for the years ended December 31,
1990, 1991 and 1992.
<TABLE>
<CAPTION>
NET ANNUAL RENT PER
RENTABLE AVERAGE OCCUPANCY SQUARE FOOT
NUMBER OF SQUARE ------------------ --------------------
PARTNERSHIP PROPERTIES FEET 1990 1991 1992 1990 1991 1992
---------- -------- ---- ---- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shurgard 1............... 6 352,000 85% 84% 89% $6.36 $6.36 $ 6.24
Shurgard 2 (1)........... 6 373,000 82 89 94 7.08 6.84 6.84
Shurgard 3 (1)........... 6 375,000 83 89 89 6.36 6.24 6.48
Shurgard 4 (1)........... 5 459,000 79 78 85 6.96 7.20 7.20
Shurgard 5............... 7 460,000 84 87 92 5.40 5.52 5.88
Shurgard 6............... 12 853,000 80 83 85 5.76 6.00 6.24
Shurgard 7............... 11 728,000 80 81 82 5.40 5.52 5.88
Shurgard 8............... 9 816,000 85 81 86 6.24 6.60 6.72
Shurgard 9............... 7 500,000 87 88 86 7.68 7.92 7.92
Shurgard 10.............. 9 701,000 73 78 80 8.76 8.88 8.76
Shurgard 11.............. 10 674,000 83 83 85 9.12 9.37 10.08
Shurgard 12.............. 10 803,000 81 80 81 8.40 8.88 9.28
Shurgard 14.............. 13 925,000 83 83 85 8.84 7.08 7.32
Shurgard 15.............. 7 480,000 70 78 75 8.28 9.12 10.15
Shurgard 16.............. 11 643,000 85 80 83 7.56 7.92 8.04
Shurgard 17.............. 6 416,000 39 69 85 8.52 8.40 10.23
Shurgard 18.............. 9 520,000 92 91 92 6.96 7.08 7.32
<FN>
- ------------------------
(1) This partnership had a fiscal year end of September 30. The numbers
presented represent the average occupancy and annual rent per square foot
for the fiscal years ended September 30, 1990, 1991 and 1992.
</TABLE>
The following table sets forth information regarding average occupancy and
average annual revenue per square foot for the properties owned by the Shurgard
REIT for the years ended December 31, 1993 and 1994 (excluding the 20 properties
acquired by the Shurgard REIT in September 1994).
<TABLE>
<CAPTION>
ANNUAL RATE
AVERAGE PER SQUARE
OCCUPANCY FOOT
NUMBER OF ----------- --------------
STATE PROPERTIES 1993 1994 1993 1994
----------------- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Arizona............. 7 97% 91% $ 6.26 $ 7.50
California.......... 17 88 86 8.85 9.28
Colorado............ 5 96 91 6.30 7.01
Florida............. 4 83 85 7.67 7.70
Illinois............ 9 91 95 7.47 7.64
Michigan............ 13 87 91 6.08 6.66
New York............ 5 80 87 14.34 14.63
Oregon.............. 6 89 93 6.82 7.22
Texas............... 24 79 87 7.41 7.63
Virginia............ 10 90 89 9.40 9.94
Washington.......... 28 88 88 7.58 7.79
Other............... 13 89 91 7.95 8.48
</TABLE>
The following table sets forth information regarding aggregate average
occupancy and average annual revenue per square foot for the properties owned by
the Shurgard REIT for the years ended December 31, 1990 through 1994 (excluding
the 20 properties acquired by the Shurgard REIT in September 1994).
<TABLE>
<CAPTION>
1990(1) 1991(1) 1992(1) 1993(2) 1994(2)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average occupancy....................... 79% 82% 86% 87% 89%
Average rent per square foot............ $7.16 $7.35 $7.68 $7.84 $8.25
<FN>
- ------------------------
(1) Calculated as the average of the information for the 17 partnerships
included in the Consolidation.
(2) Calculated as the weighted average of the original 141 properties owned by
the Shurgard REIT.
</TABLE>
41
<PAGE>
LEASING OF PROPERTIES. Rental units are usually rented on a month-to-month
basis, but longer term leases are used in some circumstances. The typical total
rental period for a tenant is approximately 1 1/2 years. Business tenants tend
to lease space for longer periods than individuals. Rental income from leased
space constitutes the primary revenue from such facilities, but additional
revenues are received from incidental services rendered at the facilities, such
as lock and box sales and truck rentals. Rental rates vary substantially
depending on the size of the storage space and the facility location and quality
of the facility. In addition, self-storage facilities range considerably in
size. Of the facilities owned by the Shurgard REIT, the smallest facility is
approximately 30,000 square feet, while the largest facility is approximately
300,000 square feet. Storage units within a facility typically range from 25 to
300 square feet of storage area. Smaller units are usually leased to individuals
for consumer goods, while large spaces are frequently leased to business and
commercial users.
OFFICE AND BUSINESS PARKS. Office and business parks are designed to
provide affordable rental space that is easily accessible to the public, usually
in a campus-like setting. Such rental space is used for a wide range of
business, industrial and commercial uses, including, among other things, office
space, light manufacturing and assembly, research and development activities,
storage and warehousing and professional and business services. The combination
of users available in any particular park depends on the market demands in the
local area. The tenants of such properties are generally new or small
commercial, industrial or professional businesses. Business and office parks
vary considerably in size and nature of construction, depending on the
properties' location, quality and purpose. The typical park consists of one to
10 separate buildings located on a site of two to 15 acres. Such parks generally
provide approximately 50,000 to 250,000 square feet of rental space with rental
units ranging in size from 500 to 5,000 square feet. Such properties are
generally landscaped and provide open or covered parking spaces for tenants and
their customers. The leasing of business and office parks differs considerably
from property to property. As a general rule, leases on such properties have a
term of one to three years. Current leasing practices differ from area to area
and actual lease terms depend on market circumstances.
The Shurgard REIT currently owns two business parks, both of which are
located near Tacoma, Washington. The Fife Business Park, which was built in 1977
and acquired in 1984 by one of the partnerships included in the Consolidation,
has approximately 63,554 net rentable square feet on 4 acres. The Tacoma
Interstate Business Park, which was built in 1979 and acquired in 1987 by one of
the partnerships included in the Consolidation, has approximately 127,760 net
rentable square feet on 12 acres.
COMPETITION
In the past 25 years there has been considerable construction and
development of self-storage facilities to meet the demand for low-cost storage.
This development has increased the competition among existing self-storage
facilities. To the extent that the existing properties operate profitably, this
will likely stimulate further development and result in greater competition
between the newly developed and existing properties. Entry into the self-storage
business through acquisition of existing facilities is relatively easy for
persons or institutions with the required initial capital. Development of new
self-storage facilities is more difficult, however, due to zoning, environmental
and other regulatory requirements. In the operation of office and business
parks, the Shurgard REIT will compete with, among others, national and regional
developers. Some of the Shurgard REIT's competitors may have more resources than
the Shurgard REIT.
42
<PAGE>
Competitors may include insurance companies, mortgage banks, pension funds
and other real estate investors, including foreign investors, real estate
syndicates and REITs. The primary factors upon which competition will be based
are location, rental rates, suitability of the property's design to prospective
tenants' needs and the manner in which the property is operated and marketed.
Competition may be accentuated by any increase in availability of funds for
investment in real estate. The extent to which the Shurgard REIT is affected by
competition will depend in significant part on general market conditions.
The Shurgard REIT believes that the significant real estate, operating and
finance experience of the Management Company's employees will substantially
assist the Shurgard REIT in competing effectively with other entities.
SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Shurgard REIT
should be read in conjunction with "-- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial
information included elsewhere in this Proxy Statement/ Prospectus.
SHURGARD STORAGE CENTERS, INC.
SELECTED FINANCIAL INFORMATION (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT OR FOR
AT OR FOR NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1993 1994
----------------- -----------------
<S> <C> <C>
OPERATING DATA:
Operating revenues..................... $-- $ 45,701
Earnings............................... -- 12,617
Net income per common share............ -- 0.74
Dividends declared per common share.... -- 0.58(2)
BALANCE SHEET DATA:
Total assets........................... $ 1 $484,774
Long-term debt......................... -- 155,121
<FN>
- ------------------------
(1) Operating data for the year ended December 31, 1993 are not included as
they are de minimis.
(2) Does not include the dividend of $.44 per share declared in October 1994
based on financial results for the quarter ended September 30, 1994.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES. On March 1, 1994, the Shurgard REIT
completed the acquisition of 17 publicly held limited partnerships administered
by the Management Company as a means for assembling an initial portfolio of real
estate investments. The Shurgard REIT acquired the assets, subject to existing
liabilities, of each of the partnerships for an aggregate cost of $387.4
million. The acquisition was funded by the issuance of 16,983,728 shares of
Shurgard REIT Common Stock and $67.1 million in proceeds from a note payable to
a financial services company. Real estate assets acquired consisted of 134
self-storage centers and two business parks located in 17 states, as well as
interests in two joint ventures owning an additional five storage centers.
On June 9, 1994, the Shurgard REIT refinanced substantially all of its
existing debt (including the $104.6 million incurred in connection with the
acquisition discussed above) with Nomura Asset
43
<PAGE>
Capital Corp., a subsidiary of Nomura Securities International, Inc., through a
debt purchase transaction. The $122.58 million loan, secured by certain real
estate, provides the Shurgard REIT with funds for seven years at a fixed rate
equal to 8.28% and requires monthly payments of interest only until maturity.
The following table summarizes the uses of proceeds from this loan:
<TABLE>
<S> <C>
Repayment of Consolidation debt............... $104,600,000
Repayment of other debt....................... 14,156,000
Loan fees and closing costs................... 2,371,000
Net proceeds.................................. 1,453,000
------------
Loan proceeds........................... $122,580,000
------------
------------
</TABLE>
In connection with this transaction, the Shurgard REIT incurred a $1.2 million
loss on early retirement of debt due to the write off of unamortized loan fees.
The refinancing provides the Shurgard REIT with stabilized debt service costs
and greater flexibility for future growth.
Additionally, in August 1994, the Shurgard REIT executed a commitment letter
with a financial services company to provide a second $50 million two-year
revolving credit facility. This credit facility, which closed in December 1994,
is secured by real estate, bears interest at LIBOR plus 175 basis points, and
requires a draw fee equal to 25 basis points of the amount drawn. The commitment
fee for the original two-year revolving period is 100 basis points of the
commitment amount.
On September 1, 1994, the Shurgard REIT purchased 20 storage centers from an
unaffiliated storage operator based in Raleigh, North Carolina for an aggregate
purchase price of $34 million. These centers were financed with $30 million from
the Company's credit facility, a $1 million note to the seller and $3 million in
cash. The new properties acquired by the Shurgard REIT were 98% occupied with
average rent per square foot of $7.34 as of June 30, 1994. The average age of
these properties is 7.6 years. Selected information regarding the newly acquired
centers is as follows:
<TABLE>
<CAPTION>
NO. OF NO. OF SQUARE
METROPOLITAN AREA STORES UNITS FEET
---------------------------------- ------ ------ -------
<S> <C> <C> <C>
Washington, D.C................... 7 2,399 252,807
Raleigh, NC....................... 5 1,567 195,130
Richmond, VA...................... 3 926 105,225
Virginia Beach, VA................ 4 1,196 147,550
Charlottesville, VA............... 1 300 31,600
------ ------ -------
20 6,388 732,312
------ ------ -------
------ ------ -------
</TABLE>
In connection with this purchase, the Shurgard REIT borrowed $30 million on
its $50 million two-year revolving credit facility. This credit facility is
secured by real estate and interest is payable monthly at 7.33% for the first
six months, and thereafter at either the bank's prime rate or LIBOR plus 200
basis points (at the Shurgard REIT's option). The commitment fee for the
original two-year revolving period was 75 basis points of the commitment amount
and, upon the expiration of such period, for an additional fee of 37.5 basis
points of the amount outstanding, the Shurgard REIT may extend any outstanding
balance for a one-year term. The Shurgard REIT's total debt at September 30,
1994 was $155.1 million, of which $122.6 million was at a fixed rate, with an
weighted average interest rate of 8.1%.
During July 1994, the Shurgard REIT entered into a joint venture with a
partnership managed by Freeman Management Corporation, a storage operator and
developer, to develop a property in Nashville, Tennessee. The Shurgard REIT owns
a 67% interest in this project, which will initially have 59,700 net rentable
square feet and is expected to be completed in early 1995. The Shurgard REIT's
investment in this project, which was funded from operating cash flow, is
$600,000. The Shurgard REIT has guaranteed repayment of $833,500 of the joint
venture's construction loan.
44
<PAGE>
During November 1994, the Shurgard REIT entered into a second joint venture
with a partnership managed by Freeman Management Corporation to develop another
property in Nashville, Tennessee. The Shurgard REIT owns a 50% interest in this
project, which will initially have 67,700 net rentable square feet and is
expected to be completed in early 1995. The Shurgard REIT's investment in this
project, which was funded from operating cash flow, is $640,000. The Shurgard
REIT has guaranteed repayment of $1,110,700 of the joint venture's construction
loan.
In January 1995, the Company entered into a third joint venture with a
partnership managed by the same developer to develop a third property in
Nashville, Tennessee. The Company will have a 91.2% interest in this project,
which will initially have 55,000 net rentable square feet and is expected to be
complete in late 1995. The Company's investment in this project, which is
expected to be funded from operating cash flow, will be $2,500,000.
In October 1994, the Shurgard REIT entered into a commitment to invest up to
$3 million in Benelux SCS, a Belgian societe en commandite simple (an entity
similar to a limited partnership) that will own and operate self-storage
facilities in the Benelux region of Europe. The Shurgard REIT has acquired
interests in Benelux SCS similar to that of general and limited partnership
interests. Through its entitlement to a majority of the seats on the board, the
Shurgard REIT currently has authority to direct the business affairs of Benelux
SCS. Its percentage interest in economic benefits from this partnership will be
determined based on its percentage of total contributed capital. As of the date
of this Proxy Statement/Prospectus, the Shurgard REIT has contributed
approximately $1.25 million in exchange for approximately 58% of the total
interests in Benelux SCS. The funding for this investment was obtained from the
Shurgard REIT's cash flow from operations.
As of December 14, 1994, the Shurgard REIT has paid $12 million and
committed an additional $1 million for investment in two 10-year participating
mortgage loans that are nonrecourse to the borrower and are secured by real
estate, including four storage centers and office/warehouse space located in the
Washington, D.C. metropolitan area. The four storage centers have in aggregate
207,000 square feet of rentable space in 1,917 units. They currently average 88%
occupancy and $10.13 annual rent per square foot. The warehouse/office space
totals 28,340 square feet, is fully occupied and provides rent of $21,000
monthly. All four centers have been managed by the Management Company for 1.5
years and, under the loan agreement, will continue to be managed by the
Management Company. The Shurgard REIT will receive interest at 8% per annum plus
50% of both operating cash flow and distributions from the sale of real
property. The Shurgard REIT has options to purchase the properties at
established prices, generally exercisable in five years and extending until
maturity of the loans. The Shurgard REIT funded this investment through a $12
million draw on its revolving credit facility.
The Shurgard REIT anticipates that cash flow from operating activities will
continue to provide adequate capital for debt service payments until maturity as
well as for dividend payments in accordance with REIT requirements. The Shurgard
REIT anticipates refinancing outstanding debt upon maturity through debt or
equity or some combination thereof. Cash provided by operating activities for
the seven months of operations was $21.8 million. Working capital reserves at
December 31, 1994 were $5.7 million and dividends declared by the Shurgard REIT
through December 1, 1994 total $1.02 per share.
RESULTS OF OPERATIONS -- MARCH 1, 1994 (BEGINNING OF OPERATIONS) THROUGH
SEPTEMBER 30, 1994. The Shurgard REIT operates a professionally managed real
estate portfolio consisting primarily of self-storage properties that provide
month-to-month leases for business and personal use. Income
45
<PAGE>
before extraordinary item for the period was $13.8 million, or $0.81 per share,
reflecting seven months of consolidated operations for 139 storage centers and
two business parks, and one month of operations for the 20 newly purchased
storage properties in the following states:
<TABLE>
<CAPTION>
PERCENTAGE OF PORTFOLIO SEPTEMBER 30, 1994-TO-DATE
BASED ON ORIGINAL COST ANNUALIZED PROPERTY
AT SEPTEMBER 30, 1994 PERFORMANCE
----------------------- --------------------------
<S> <C> <C>
California............... 15.2% 11.1%
Florida.................. 5.8% 10.7%
New York................. 5.4% 12.4%
Texas.................... 14.6% 10.9%
Virginia................. 9.0% 11.7%
Washington............... 20.2% 11.6%
Other.................... 29.8% 12.5%
-----
Total................ 100.0%
-----
-----
</TABLE>
The table above provides measures of geographic diversity and earnings as a
percentage of historical cost. Performance measures are annualized to allow
comparisons between periods and to equivalent competitor information. The
annualized property performance percentages are determined by dividing the
annualized property level net operating income (rental revenue less operating
expenses, real estate taxes and management fees) for the seven months ended
September 30, 1994 by the original acquisition cost. This performance is not
necessarily indicative of what the actual property performance percentages for
the full year will be. Net operating income is not reduced by depreciation or
certain general and administrative expenses; had it been, the percentages would
be lower. This performance measure should not be construed as a yield or return
on investment.
PRO FORMA RESULTS OF OPERATIONS. As the Shurgard REIT did not begin
operating the properties until March 1, 1994, management believes that the pro
forma information presented is necessary to provide more meaningful comparative
information for the nine months ended September 30, 1994. The pro forma
statements provided compare the operating results of the combined 17
partnerships for the nine months ended September 30, 1993 and the pro forma
results of operations of the Shurgard REIT for the nine months ended September
30, 1994 as if the Consolidation had occurred on January 1, 1994.
In connection with the Consolidation, certain of the partners, representing
the equivalent of 3.5 million shares of Shurgard Class A Common Stock, elected
to take cash and liquidate their investment. The Shurgard REIT borrowed the $67
million required for these cash payments and the corresponding interest expense
is reflected in the 1994 earnings. Interest on the $67 million for the nine
months ended September 30, 1994 is approximately $4.2 million. Additionally, as
a result of the Consolidation, the majority of the debt held by the
partnerships, including short-term debt at relatively low interest rates, had to
be refinanced at a slightly higher rate (8.28%). This increase in interest
expense is the primary reason for the difference in both expense and earnings
for the nine months ended September 30, 1994 compared to the combined
partnership earnings for the same period in 1993.
Rental revenues increased 7.5% to $58 million for the nine months ended
September 30, 1994, primarily due to rental rate increases. Rental rates for the
original portfolio increased by 4.6% to $8.16 per square foot for the nine
months ended September 30, 1994 compared to $7.80 per square foot for the same
period in 1993. Occupancy rates rose from 87% for the nine months ended
September 30, 1993 to 89% for the nine months ended September 30, 1994.
Operating expenses rose 6%, reflecting moderate increases in various expenses,
including utilities, repair and maintenance expense, as well as revenue-based
bonuses for on-site personnel. Management fees decreased because the
partnership's contracts contained provisions for incentive management fees which
were being paid in addition to the 6% of revenues for two of the partnerships;
no such provision exists in the Shurgard REIT's management contract.
Depreciation decreased because the original cost of the storage centers to the
46
<PAGE>
Shurgard REIT was lower than the original cost to the partnerships. General and
administrative expenses rose as a result of certain new expenses not previously
incurred by the partnerships, including franchise taxes and directors' and
officers' insurance, as well as expenses relating to the Shurgard REIT's
expansion efforts.
Based on current operating performance, the 20 properties acquired on
September 1, 1994 are expected to add approximately $460,000 annually to
consolidated net income, $5.8 million to revenues and $5.3 million to expenses.
Pro forma adjusted net income was not presented due to the immaterial nature of
the transaction.
POLICIES REGARDING INVESTMENT AND CERTAIN OTHER ACTIVITIES
Set forth below is a summary of certain of the Shurgard REIT's policies with
respect to investment, financing, conflicts of interest transactions and certain
other activities. The policies with respect to these activities have been
determined by the Shurgard REIT Board. As described below, a number of these
policies are contained in the By-Laws, and may not be amended, repealed or
modified, or inconsistent provisions adopted with respect thereto, without an
affirmative vote of shareholders holding the majority of the outstanding shares
entitled to vote. The Shurgard REIT Board may amend or repeal those policies
that are not contained in the By-Laws without shareholder approval if it
determines in the future that such change is in the best interests of the
Shurgard REIT and its shareholders.
ACQUISITION, DEVELOPMENT AND INVESTMENT POLICIES
ACQUISITIONS. Subject to specific restrictions in its By-Laws, the Shurgard
REIT may acquire investments in such manner, through such means, and upon such
terms and conditions as may be determined by the Shurgard REIT Board. Such
investments may include, but are not limited to, direct investments by the
Shurgard REIT in real estate interests, as well as investments in corporations,
business trusts, general partnerships, limited partnerships, joint ventures or
other legal entities owning or holding real estate investments that could have
been made by the Shurgard REIT. The Shurgard REIT intends to structure these
investments to permit the Shurgard REIT to qualify as a REIT under the Code. The
timing and extent of such investments will depend on various factors such as the
Shurgard REIT's capitalization, availability of attractive investments, expected
investment returns and other similar economic factors generally considered when
making real estate investments.
PROPERTY DEVELOPMENT. The Shurgard REIT may acquire unimproved property for
development, or existing improvements for conversion, into self-storage
facilities. To the extent that such acquisitions are made, the Shurgard REIT
will be subject to the development and leasing risks associated with
constructing and developing new facilities. See "RISK FACTORS -- General Real
Estate Investment Risks and Self-Storage Industry Risks -- Risks of Real Estate
Development." It has been the Management Company's experience that a
self-storage facility must be approximately 35% to 40% occupied (on the basis of
square footage of cubicle storage space) in order for gross receipts from
operations to equal or exceed normal operating expenses (exclusive of debt
service payments associated with the property). Given the anticipated lease-up
timeframe, the Shurgard REIT will not normally expect a developed facility to
generate positive cash flow for distribution, or for payment of the Shurgard
REIT's debt service, during the first six months after the acquisition of a
property for development. As a general rule, the Shurgard REIT plans to acquire
and develop facilities primarily in the markets that the Shurgard REIT already
operates in.
MORTGAGE LOANS. Since the Shurgard REIT operates primarily as an equity
REIT (i.e., substantially all of the Shurgard REIT's assets will consist of
equity investments, direct or indirect, in real estate assets, not in debt
investments), the Shurgard REIT does not, generally speaking, intend to utilize
material amounts of its available capital to acquire mortgage loans. Under its
By-Laws, the Shurgard REIT is, however, authorized to invest up to 25% of its
total assets in mortgage loans secured by real estate of a type in which the
Shurgard REIT is authorized to invest. Such investments
47
<PAGE>
must also satisfy certain other restrictions set forth in the By-Laws,
including, among others, the requirements that the aggregate amount of the
mortgage loan and all senior indebtedness secured by the property not exceed 90%
of the appraised or Board-determined value of the property and that the
aggregate value of mortgage loans junior to other secured indebtedness does not
exceed 10% of the Shurgard REIT's total assets. The Shurgard REIT recently
committed approximately $13 million in mortgage loans. See "SHURGARD STORAGE
CENTERS, INC. -- Business -- Recent Developments."
Consistent with these guidelines, the Shurgard REIT may, on occasion, loan
funds to third parties to construct self-storage facilities or office and
business parks. At the time such mortgage loans are made, the Shurgard REIT may
contract to purchase the property upon completion of development or after
certain other conditions, such as minimum net income levels, have been achieved.
EQUITY INVESTMENTS AND JOINT VENTURES. As a general rule, the Shurgard REIT
invests directly in real estate by obtaining the deed to the property. There
may, however, be situations where the Shurgard REIT Board considers it
preferable for the Shurgard REIT to invest in real estate by acquiring an equity
interest in a separate legal entity, such as a partnership, limited partnership,
joint venture, another REIT or trust, that in turn has an equitable interest in
or legal title to real estate. The By-Laws place certain restrictions upon the
Shurgard REIT's right to invest in general partnerships, joint ventures,
associations, trusts, limited partnerships or other legal entities. Such
investments may not be made if they would jeopardize the qualification of the
Shurgard REIT as a REIT under the Code or result in the Shurgard REIT's becoming
an investment company (within the meaning of the Investment Company Act of 1940,
as amended). Prior to making any such investment, the Shurgard REIT Board must
determine that its terms and conditions are fair to the Shurgard REIT and that
the principal purpose of the joint enterprise is to invest in properties that
would constitute appropriate investments for the Shurgard REIT, or to render
ancillary services in connection with such real estate investments. Though there
is no policy requiring the Shurgard REIT to exercise control of joint
enterprises, the Shurgard REIT Board may determine that such control is in the
best interests of the Shurgard REIT under the circumstances. The Shurgard REIT
has recently entered into two joint ventures to develop self-storage facilities
in the Nashville area and recently invested in Benelux SCS. See "SHURGARD
STORAGE CENTERS, INC. -- Business -- Recent Developments."
NONSTORAGE FACILITY INVESTMENTS. Although the Shurgard REIT's primary
investment objectives are to acquire and develop income-producing self-storage
facilities and office and business parks with property level cash flow growth
potential, it is allowed to invest in commercial real estate other than
self-storage facilities or office and business parks if such investments are
specifically approved by the Shurgard REIT Board after certain determinations
have been made. This authority is intended to afford the Shurgard REIT Board
flexibility in selecting appropriate investments for the Shurgard REIT and
adjusting to changes in the marketplace, without requiring amendments to the
By-Laws and shareholder approval. No such investments will be made unless the
Shurgard REIT Board makes the following determinations as to the proposed
investment: (i) the acquisition and holding of the investment would not
jeopardize, or in the future be likely to jeopardize, the qualification of the
Shurgard REIT as a REIT under the Code; (ii) the Shurgard REIT's management has
the experience and expertise necessary for effective management of the
investment or has contracted or will contract, on behalf of the Shurgard REIT,
with a third party having such experience and expertise; and (iii) the
investment constitutes a prudent and reasonable investment by the Shurgard REIT
and is being made for the purpose of (a) maximizing the value of property
acquired by the Shurgard REIT, a portion of which is being used as or was
acquired for the purpose of a self-storage facility or office and business park,
or (b) diversifying the Shurgard REIT's portfolio to protect the value of its
assets and to hedge against the risk of having the Shurgard REIT's assets
concentrated in self-storage facilities and office and business parks. Since the
Consolidation, the Shurgard REIT has not made, and has no present plans to make,
any such investments.
TEMPORARY INVESTMENTS. Before investing or reinvesting its funds in
properties or other suitable investments, the Shurgard REIT may invest available
funds (as well as its reserves) in the following
48
<PAGE>
temporary investments: United States Government securities, bankers'
acceptances, certificates of deposit, bank repurchase agreements covering
securities of the United States Government or governmental agencies, commercial
paper rated A-1 or better by Moody's Investors Services, Inc. or any other
nationally recognized rating agency, interest-bearing time deposits in banks and
thrift institutions, money market funds, mortgage-backed securities issued or
guaranteed by the United States Government or its agencies, debt securities or
equity securities collateralized by debt securities rated A-1 or better by
Moody's Investors Services, Inc. or any other nationally recognized rating
agency, other short- or medium-term liquid investments or hybrid debt/equity
securities approved by the Shurgard REIT Board or any combination of these
investments. As of December 1, 1994, the Shurgard REIT had invested $9.7 million
in such temporary investments.
OTHER INVESTMENT RESTRICTIONS. In addition to the various investment
restrictions discussed elsewhere in this Proxy Statement/Prospectus, the
Shurgard REIT may not:
(i) invest more than 10% of its Total Assets (as defined below) in
unimproved real property or mortgage loans secured by unimproved real
property (generally speaking, unimproved real property is defined as
property for which no significant development activity is planned within one
year of acquisition);
(ii) invest in foreign currency, bullion, commodities or commodity
future contracts;
(iii) invest in contracts for the sale of real estate;
(iv) engage in underwriting or the agency distribution of securities
issued by others;
(v) issue "redeemable securities" (as defined in Section 2(a)(32) of the
Investment Company Act of 1940, as amended), "face amount certificates of
the installment type" (as defined in Section 2(a)(15) thereof) or "periodic
payment plan certificates" (as defined in Section 2(a)(27) thereof (I.E.,
securities of the type that might cause the Shurgard REIT to be regarded as
an investment company under the Investment Company Act of 1940, as
amended));
(vi) issue options, warrants or similar evidences of a right to purchase
the Shurgard REIT's securities except in accordance with specific
requirements set forth in the By-Laws;
(vii) engage in short sales or borrow, on an unsecured basis, if such
borrowing will result in asset coverage of less than 300%;
(viii) engage in trading activities in securities, as compared with
investment activities; or
(ix) acquire securities in any company holding investments or engaging in
activities prohibited by paragraphs (i) through (iv), (vi) and (viii) above.
FINANCING AND RESERVE POLICIES
INDEBTEDNESS RESTRICTIONS. Subject to the following restrictions, the
Shurgard REIT may, at any time, at the discretion of the Shurgard REIT Board,
borrow funds, on a secured or unsecured basis, and in connection therewith
execute, issue and deliver promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations (which may be convertible into
shares or other equity interests or be issued together with warrants to acquire
shares or other equity interest). Under the By-Laws, the Shurgard REIT may not
incur debt if after giving effect to such borrowing, the Shurgard REIT's
Indebtedness (as defined below) would exceed 50% of its total assets or 300% of
its adjusted net worth. The ceiling imposed upon the Shurgard REIT's
Indebtedness does not prohibit the Shurgard REIT from incurring Indebtedness as
necessary to refinance Indebtedness previously obtained by the Shurgard REIT,
which was permissible at the time such Indebtedness was obtained, and to make
distributions to shareholders to preserve the eligibility of the Shurgard REIT
as a REIT under the Code. The restriction on the Shurgard REIT's authorization
to borrow funds is to be applied at the time the borrowing is obtained by the
Shurgard REIT. Any borrowing by the Shurgard REIT permitted at such time does
not become unauthorized, or constitute a violation of the By-Laws, even if,
49
<PAGE>
subsequent to the Shurgard REIT's borrowing such funds, the Shurgard REIT's
Indebtedness exceeds the applicable limitation, whether or not such excess is
due, in part, to any accrued but unpaid interest, late fees or penalties,
finance charges or other amounts due with respect to the Shurgard REIT's new
borrowing or previous borrowings. As of September 30, 1994, the Shurgard REIT's
Indebtedness was 32% of its Total Assets.
"Indebtedness" means all amounts due on financial obligations of the
Shurgard REIT evidencing its obligations to repay funds borrowed to finance its
business and affairs. "Indebtedness" includes all forms of borrowing, excludes
other liabilities of the Shurgard REIT such as accounts payable, lease
obligations (including leases required to be capitalized in accordance with
generally accepted accounting principles), liabilities or claims against the
Shurgard REIT arising from contract disputes or torts (except to the extent that
such liabilities and claims are with respect to contracts for the payment of
money) or the liabilities of other issuers in which the Shurgard REIT might have
invested. "Indebtedness" includes amounts borrowed by any of the Shurgard REIT's
wholly owned subsidiaries.
"Total Assets" means, as of the date the amount is to be determined, the
greater of (i) the Shurgard REIT's total assets computed in accordance with
generally accepted accounting principles, consistently applied (and which would
be reflected on the Shurgard REIT's balance sheet if such balance sheet were
prepared as of such date), plus all accumulated depreciation and amortization as
of such date, and (ii) the fair market value of the Shurgard REIT's assets
determined in accordance with guidelines established by the Shurgard REIT Board,
consistently applied. In the event the Shurgard REIT Board believes the fair
market value of the Shurgard REIT's assets exceeds their book value plus
accumulated depreciation and amortization, the Shurgard REIT may implement
procedures to ascertain the fair market value of the assets. There is no
requirement that these valuations be established through appraisals from third
parties, or be computed in accordance with any particular set of guidelines, but
only that the same valuation procedures be applied on a consistent basis over
time. The Shurgard REIT Board may, however, change such valuation procedures for
convenience or for such other purposes as it deems appropriate, as long as such
changes in the valuation procedures would not, if applied retrospectively, have
prohibited the Shurgard REIT from borrowing funds at any time that funds were
borrowed by the Shurgard REIT.
Funds borrowed by the Shurgard REIT may be used, as directed by the Shurgard
REIT Board, to make investments, pay dividends or ensure the Shurgard REIT's
continuing eligibility to qualify as a REIT, pay operating or other expenses,
refinance the Shurgard REIT's other obligations, and cover other expenses and
costs incurred by the Shurgard REIT or for other purposes deemed appropriate by
the Shurgard REIT Board. Such funds may be borrowed from institutional lenders,
banks, savings and loan institutions or other sources of capital.
Furthermore, to the extent the Shurgard REIT must pledge all or a portion of
the assets to secure borrowings, the Shurgard REIT may be required by lenders to
transfer such assets to one or more corporate subsidiaries created and wholly
owned by it. The subsidiaries' purpose is to segregate and shield the properties
securing the particular borrowings from the Shurgard REIT's other creditors and
restrict the Shurgard REIT's use of related cash flow from the properties other
than for the repayment of the related borrowings. The Shurgard REIT intends that
such subsidiaries, if created, will qualify as "qualified REIT subsidiaries," as
that term is defined in the Code, and their existence should not adversely
affect the Shurgard REIT's qualification as a REIT. See "FEDERAL INCOME TAX
CONSEQUENCES -- Tax Consequences to Management Company Shareholders Receiving
Shurgard Class A Common Stock -- Nature of Assets."
RESERVES. The Shurgard REIT has specific reserve requirements as to capital
expenditures, taxes and insurance for certain properties that secure debt. In
addition, the Shurgard REIT regularly evaluates and establishes working capital
reserves as it deems appropriate to meet normal contingencies in connection with
the operation of its business and investments. In the event that reserves
established by the Shurgard REIT are not sufficient to cover operating expenses
or unanticipated liabilities and claims, the Shurgard REIT may attempt to borrow
funds or liquidate assets. There can
50
<PAGE>
be no assurance that the Shurgard REIT will be able to borrow such funds or
liquidate investments on terms favorable to the Shurgard REIT. Funds held in
working capital reserves may be invested as discussed under "-- Temporary
Investments."
CONFLICT OF INTEREST POLICIES
Except as specifically provided in the By-Laws, the Shurgard REIT may not
engage in a transaction with any director, officer, shareholder owning or
controlling 10% or more of the Shurgard REIT's outstanding voting securities,
its advisor and/or any affiliate of the foregoing (collectively, the "interested
parties"). As to proposed transactions between the Shurgard REIT and any of the
interested parties, the following apply:
(i) The Shurgard REIT may not purchase property from any of the
interested parties unless after the disclosure to the Shurgard REIT Board of
the interested party's interest in the proposed transaction, a majority of
the directors not otherwise interested in such transaction (including a
majority of the independent directors) determines in good faith that the
property is being offered to the Shurgard REIT upon terms fair and
reasonable to the Shurgard REIT and at a price no greater than the cost of
such asset to the interested party.
(ii) The Shurgard REIT may not sell any property to its advisor, a
director or any affiliate thereof.
(iii) The Shurgard REIT may not make loans to, or borrow funds from, any
of the interested parties unless, after disclosure to the Shurgard REIT
Board of the interested party's interest in the proposed transaction, a
majority of directors not otherwise interested in such transaction
(including a majority of the independent directors) approve the transaction
as being fair, competitive and commercially reasonable and no less favorable
to the Shurgard REIT than loans between unaffiliated lenders and borrowers
under the same circumstances.
(iv) The Shurgard REIT may not enter into any other transaction with an
interested party unless:
(a) the terms and conditions of such transaction have been disclosed
to the Shurgard REIT Board in advance and approved by a majority of the
directors not otherwise interested in the matter (including a majority of
independent directors) (the disclosure required by this paragraph to be
in writing and to describe all material terms and conditions of the
proposed transaction) and
(b) such directors in approving the transaction have in good faith
determined that the transaction is fair, reasonable to and no less
favorable to the Shurgard REIT than transactions available from
unaffiliated third parties.
The determinations required of the Shurgard REIT Board must be set forth
in writing, together with such explanation as the directors deem
necessary or advisable, and must be filed with the Shurgard REIT's books
and records.
POLICY WITH RESPECT TO DIVIDENDS AND CERTAIN OTHER ACTIVITIES
DIVIDEND POLICY. Dividends will be paid to shareholders from time to time
when declared by the Shurgard REIT Board, in accordance with the following
policies. The Shurgard REIT intends to distribute to shareholders each year at
least 95% of its "REIT Taxable Income" so that the Shurgard REIT will be
eligible for tax treatment as a REIT. Generally speaking, "REIT Taxable Income"
includes taxable income from operations (including depreciation deductions), but
excludes gains from the sale or refinancing of properties and deductions for
dividends paid. The Shurgard REIT may, in addition, distribute cash flow
sheltered by depreciation deductions if such amounts are not needed for working
capital reserves, debt payments and capital improvements and replacements. In
1995, the Shurgard REIT will make distributions in excess of its REIT Taxable
Income to eliminate any accumulated earnings and profits acquired from the
Management Company in the Merger. See "FEDERAL INCOME TAX CONSEQUENCES --
Consequences of the Merger on the Shurgard
51
<PAGE>
REIT's Qualification as a REIT -- Distributions of Accumulated Earnings and
Profits Attributable to Non-REIT Years." The Shurgard REIT does not intend to
distribute net cash receipts from sales or refinancings of assets, but to retain
such funds to make new investments or for other corporate purposes.
The Shurgard REIT is required to distribute its REIT Taxable Income without
regard for, or reduction of, principal payments made on account of the Shurgard
REIT's Indebtedness because principal payments do not reduce the Shurgard REIT's
Taxable Income. To the extent the Shurgard REIT is obligated to make substantial
principal payments in any year, such payments might make it difficult or
impossible for the Shurgard REIT to satisfy its obligation of distributing 95%
of its REIT Taxable Income.
ANCILLARY SERVICES. While rental income from leased space constitutes the
primary source of revenues from the properties owned by the Shurgard REIT,
additional revenues are received from incidental services and products available
at the properties for tenants and others (the "Ancillary Services"). Currently,
approximately 50% of the properties owned by the Shurgard REIT receive revenues
through truck rental operations conducted at the properties and lock and box
sales to tenants and others. While revenues from Ancillary Services constitute
Nonqualifying Income (I.E., income other than generally rents, dividends,
interest or gains from the sale of real property) that, together with other
sources of Nonqualifying Income, may not exceed 5% of the Shurgard REIT's gross
revenues without jeopardizing the Shurgard REIT's qualification as a REIT, the
Shurgard REIT believes that revenues from such Ancillary Services are an
integral part of its properties' operation. See "FEDERAL INCOME TAX CONSEQUENCES
- -- Consequences of the Merger on the Shurgard REIT's Qualification as a REIT --
Nonqualifying Income." As a result, the Shurgard REIT may offer a number of
Ancillary Services directly, but only if the provision of Ancillary Services
does not, in the Shurgard REIT Board's judgment, jeopardize the Shurgard REIT's
eligibility for tax treatment as a REIT under the Code.
ISSUANCE AND REPURCHASE OF SECURITIES. The Shurgard REIT Board is
authorized to issue up to 40,000,000 shares of Preferred Stock. No such shares
have been issued, and the Shurgard REIT Board does not presently contemplate the
issuance of any Preferred Stock, except such as may be issued in accordance with
the Shurgard REIT's shareholder rights plan. The Shurgard REIT may issue
securities in exchange for property or repurchase or otherwise reacquire its
capital stock. In particular, the Certificate of Incorporation allows the
repurchase of "Excess Stock." Since its incorporation, however, the Shurgard
REIT has not engaged in these activities and has no current plans to do so. See
"DESCRIPTION OF SHURGARD REIT CAPITAL STOCK."
AMENDMENT OF THE ORGANIZATIONAL DOCUMENTS. The Shurgard REIT's Certificate
of Incorporation may be amended as provided by the DGCL upon the affirmative
vote of more than 50% of the total shares entitled to vote. Generally, a
majority of the directors may amend the By-Laws without the vote or consent of
the shareholders of the Shurgard REIT. The shareholders of the Shurgard REIT may
propose and adopt amendments to the By-Laws by a majority vote of the
shareholders.
ANNUAL REPORT. The Shurgard REIT Board is required to cause to be sent to
the Shurgard REIT's shareholders an annual report that contains financial
statements prepared in accordance with generally accepted accounting principles
and reported on by independent certified public accountants. The report must
disclose the ratio of the costs of raising capital to the capital raised, the
aggregate fees paid to the advisor and its affiliates, and all material terms,
factors and circumstances surrounding any and all transactions involving the
Shurgard REIT and its directors, advisors and the affiliates thereof for the
previous fiscal year.
52
<PAGE>
SHURGARD INCORPORATED
The Management Company is a fully integrated real estate operating company,
with in-house expertise covering all aspects of the self-storage industry,
including real estate acquisition, development and disposition, project design
and consulting, full-service property management capabilities, marketing,
property finance and disposition, personnel management, legal, accounting and
finance. As of December 31, 1994, the Management Company employed, directly or
through affiliated owners, 619 employees. It is one of the largest self-storage
operators in the United States. The Management Company was incorporated as a
Washington corporation in 1972 by Charles K. Barbo and Donald B. Daniels to
sponsor and operate real estate investments. To finance these investments, the
Management Company organized a series of investment partnerships, in the form of
limited partnerships, joint ventures and general partnerships, that were
separately funded through partnership contributions to acquire and/or develop
single assets or pools of assets, and provided for the management of these
assets by the Management Company. The Management Company rendered to each of
these entities a variety of services relating to the acquisition, development
and management of the assets. On occasion, the Management Company has also
contracted with third parties to manage their properties.
Since its formation, the Management Company has been involved in the
organization of 20 public partnerships, which have raised approximately $600
million from 80,600 investors. All of these partnerships had the similar
investment objective of investing in the ownership and operation of self-storage
facilities. They differed from the objectives of the Shurgard REIT to the extent
that the partnerships passed through profits and losses to the partners, and
were intended to dispose of the properties before the end of the finite life of
the partnership. The REIT, by contrast, is a perpetual life entity, and has
different tax characteristics than limited partnerships. Of the 20 public
partnerships, 17 were consolidated to form the Shurgard REIT. The three
remaining public partnerships are making current distributions to their limited
partners and have not yet reached the time frame originally projected for
disposition. As of December 1, 1994, the Management Company had under management
245 self-storage facilities with approximately 15.6 million net rentable square
feet and three office and business parks with approximately 220,000 net rentable
square feet. These properties are located in 20 states. Of these, 161 properties
(representing 65% of all properties managed) are owned by the Shurgard REIT, 69
properties (representing 28%) are owned by entities affiliated with the
Management Company and 18 properties (representing 7%) are managed by the
Management Company under third-party management contracts for unaffiliated
owners. The Management Company maintains its corporate headquarters in Seattle,
Washington, and has offices in the Atlanta, Dallas, Phoenix and Seattle
metropolitan areas.
Over the years, the Management Company has developed and refined operational
systems and
procedures to enhance the value of the real estate investments under its
management. The Management Company maintains extensive market research on its
primary markets that permits it to track occupancy levels, rental rates and
other relevant operational information regarding self-storage facilities within
the market, monitor the number of new projects and identify investments for
potential acquisition. Through its involvement in the development of facilities
for sponsored programs, the Management Company has obtained substantial design,
engineering and architectural experience and, while actual construction and
design services are performed by outside architects and engineers, the
Management Company supervises and oversees property development through its
in-house technical staff. The Management Company has implemented various
employee-incentive programs and a quality-control system to maximize property
performance. Detailed monthly financial reports are prepared for each of the
properties managed by the Management Company to permit monitoring of property
performance, identify operational concerns, track the success of quality control
and incentive programs and assess employee performance. The Management Company
sends periodic reports (usually quarterly) to investors to apprise them of their
investments' performance.
53
<PAGE>
MANAGEMENT SERVICES
GENERAL. As a result of the Merger, the Shurgard REIT will become
responsible for the day-to-day management of its own properties and will become
the property manager of certain other properties owned by affiliates of the
Management Company and by third parties which have contracted with the
Management Company to provide property management services. The Shurgard REIT
will succeed to all of the Management Company's rights under the management and
related agreements with these other entities (collectively, the "Management
Agreements"). As of December 1, 1994, the Management Company managed 87
self-storage facilities for owners other than the Shurgard REIT. Income received
by the Shurgard REIT for providing these services to third parties will be
Nonqualifying Income. See "FEDERAL INCOME TAX CONSEQUENCES -- Consequences of
the Merger on the Shurgard REIT's Qualification as a REIT -- Nonqualifying
Income."
Set forth below is a table that summarizes the properties currently managed
by the Management Company, as well as the compensation received by the
Management Company with respect to its management services, which (subject to
obtaining any necessary consents) will accrue to the Shurgard REIT as the
Management Company's successor. The Management Agreements generally have
relatively short terms, with automatic one-year renewals unless 60 days' notice
of nonrenewal is given by the owner or the Shurgard REIT. In addition, the
Management Agreements may generally be terminated by the owner upon 60 days'
written notice to the Shurgard REIT, with or without cause. The Shurgard REIT
may likewise terminate the Management Agreement, with or without cause, upon 60
days' written notice. However, in some cases the Shurgard REIT's right to
terminate the Management Agreement will be restricted for the term of the
Management Agreement or a specified shorter period of time, during which
termination is only permitted if the owner has defaulted in performing its
obligations or upon the bankruptcy of the owner or the Shurgard REIT or other
similar events evidencing an inability to pay obligations as they become due.
The table does not include amounts received by the Management Company for
distributions due to ownership interests in certain partnerships, or amounts
reimbursed to the Management Company. Except as otherwise indicated, the
property management and other fees paid to the Management Company consist of a
standard management fee of 6% of gross revenues from self-storage operations and
5% of gross revenues from office and business parks (the "Standard Management
Fee") and a standard advertising fee of $75 per property per month (the
"Standard Advertising Fee"). The Standard Management Fee is reduced to 3% with
respect to rental units for which leasing services are performed by a party
other than the Management Company, but such 3% fee is in addition to the fees
payable to such other party for leasing services. In addition to the Standard
Advertising Fee, the property owner pays for the actual cost of all advertising
materials, time and space provided to the owner by the Management Company.
<TABLE>
<CAPTION>
PROPERTY MANAGEMENT AND
OTHER FEES PAID TO THE
MANAGEMENT COMPANY
----------------------------
AGGREGATE NINE MONTHS EXCEPTIONS TO
NET RENTABLE YEAR ENDED ENDED STANDARD MANAGEMENT FEE AND
NUMBER OF SQUARE FEET OF DECEMBER 31, SEPTEMBER 30, STANDARD ADVERTISING FEE
PROPERTY OWNER PROPERTIES PROPERTIES 1993 1994 (FOOTNOTE REFERENCES)
- ---------------------------------------- --------- -------------- ------------ ------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Shurgard Storage Centers, Inc........... 161 10,583,000 $4,547,533 $3,633,165 1,2,3,4
Shurgard Incorporated................... 1 96,000 2,975 49,456 4
IDS/Shurgard Income Growth
Partners L.P........................... 8 498,000 243,700 192,017
IDS/Shurgard Income Growth
Partners L.P. II....................... 8 499,000 224,301 180,813
IDS/Shurgard Income Growth
Partners L.P. III...................... 17 1,051,000 272,576 313,438
Shurgard Institutional Fund L.P......... 7 391,000 215,411 169,676
Shurgard Institutional Fund L.P. II..... 3 120,000 38,298 105,773 5
Shurgard Evergreen Limited
Partnership............................ 7 442,000 197,825 205,152 6
Shurgard Institutional Partners......... 3 190,000 96,161 70,314
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
PROPERTY MANAGEMENT AND
OTHER FEES PAID TO THE
MANAGEMENT COMPANY
----------------------------
AGGREGATE NINE MONTHS EXCEPTIONS TO
NET RENTABLE YEAR ENDED ENDED STANDARD MANAGEMENT FEE AND
NUMBER OF SQUARE FEET OF DECEMBER 31, SEPTEMBER 30, STANDARD ADVERTISING FEE
PROPERTY OWNER PROPERTIES PROPERTIES 1993 1994 (FOOTNOTE REFERENCES)
- ---------------------------------------- --------- -------------- ------------ ------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Shurgard/Canyon Park Self-Storage
Limited Partnership.................... 1 69,000 41,162 31,136 2,7
B-D Mini-Storage of Billings............ 1 66,000 18,998 13,269
B-D Mini-Storage of Flint West.......... 1 48,000 15,426 12,591
B-D Mini-Storage of Puyallup............ 1 28,000 13,321 9,205
Potomac Mini-Storage.................... 4 207,000 80,867 87,545
Self-Service Storage Partners, L.P...... 10 447,000 169,480 128,957 8
Shurgard Limited Edition................ 1 66,000 24,690 20,289
Shurgard Mini-Storage of Flint South.... 1 44,000 12,833 10,592
Shurgard Mini-Storage of West
Yakima................................. 1 60,000 15,194 10,838
Shurgard of Des Moines.................. 1 58,000 21,689 17,300
Shurgard of Everett Mall................ 1 100,000 9,905 17,794
Shurgard of Factoria.................... 1 103,000 28,667 30,581
Shurgard of Fife........................ 1 43,000 17,407 13,112
Shurgard of Gig Harbor.................. 1 35,000 17,474 13,237
Shurgard of Greenspoint................. 1 40,000 9,193 14,129
Shurgard of Old Hickory................. 1 64,000 0 8,196 9
Shurgard of South Hill.................. 1 44,000 17,786 11,693 10
Shurgard of Stanwood.................... 1 43,000 0 6,892
Shurgard of Taylor...................... 1 66,000 26,978 21,074
Shurgard of Twin Lakes.................. 1 57,000 17,311 16,493
Shurgard of Woodhaven................... 1 50,000 7,576 11,445
--- -------------- ------------ -------------
Total............................... 248 15,608,000 $6,404,737 $5,426,172
-------------- ------------ -------------
-------------- ------------ -------------
<FN>
- ------------------------------
(1) The Management Company also receives an advisory fee equal to one-half of
1% of the value of new real estate related investments made by the Shurgard
REIT subsequent to March 1, 1994. This fee will be discontinued upon the
consummation of the Merger.
(2) The Shurgard REIT has a 90% interest in Capital Hill Partners, a Limited
Partnership. This table includes 100% of this partnership's applicable
fees.
(3) The Shurgard REIT has a 30% interest in Shurgard Joint Partners II. This
partnership has four properties. The remaining interest is owned by a
partnership affiliated with the Management Company. This table includes
100% of this partnership's applicable fees.
(4) The Standard Management Fee, Standard Advertising Fee and the advisory fee
(with respect to the Shurgard REIT) will be eliminated upon the
consummation of the Merger.
(5) The Management Company also receives a monthly asset management fee equal
to .067% of the property value of the partnership's real estate investments
computed at the end of each month.
(6) The Management Company also receives a quarterly asset management fee equal
to $1,625 for each property owned by or invested in by the partnership,
subject to a minimum of $12,500 per quarter.
(7) Shurgard Institutional Fund L.P. serves as the sole general partner of this
limited partnership and, pursuant to the agreement of limited partnership,
is entitled to approximately 85% of the partnership's cash distributions
and tax allocations. The balance of the partnership's interests are owned
by the sole limited partner, an entity not affiliated with the Management
Company.
(8) The Management Company receives an asset management fee equal to 1% of
gross monthly revenues of the partnership for performing certain
administrative functions for the partnership.
(9) The Management Company does not receive the Standard Management Fee or the
Standard Advertising Fee for this property. The Management Company receives
2% of gross revenues from operation of this self-storage facility under an
affiliation agreement with the owner. This fee is comprised of 1% for
licensing the use of the Shurgard name and 1% for providing certain
accounting and administrative services.
(10) The Management Company is entitled to the Standard Management Fee of 6% of
gross revenues from operation of the self-storage facilities, but has
permitted 1% to be deferred.
</TABLE>
SCOPE OF SERVICES. Under the Management Agreements, the Shurgard REIT will
be vested with general responsibility and authority for all aspects of property
management, including, but not
55
<PAGE>
limited to, the establishment of operational policies, the leasing, marketing,
advertising, maintenance and security of the properties, the supervision of
construction, repairs and improvements and the employment and supervision of
on-site personnel, contract services, consultants, contractors and other
professionals. All costs and expenses of managing these assets will be borne by
the relevant owner, except to the extent that certain items are not
reimbursable.
The Shurgard REIT will also be obligated to render certain administrative
services with respect to the properties it manages, including, but not limited
to, supervising the preparation of investor reports, handling investor
inquiries, coordinating federal and state tax and securities filings,
maintaining books and records, investing uncommitted funds, if any, and
distributing available cash to investors and such entities. The Shurgard REIT's
costs and expenses incurred in performing such services will be reimbursed. Such
reimbursement is subject to review by independent certified public accountants
and will be at the lower of actual cost or the amount the owner of the property
would be required to pay to independent parties for comparable services in the
same geographical location. No reimbursement will be made for services for which
a separate fee is paid.
The Shurgard REIT may delegate any or all of its powers under the Management
Agreements to any third party so long as the Shurgard REIT remains responsible
for supervising the performance of the duties and responsibilities so delegated
and remains liable for such performance to the extent it would be liable if it
had performed the delegated duties and responsibilities itself. Accordingly, the
Shurgard REIT may perform such duties through its own employees or those of
affiliates or may cause the relevant owner to hire its own employees. It is
currently anticipated that the on-site personnel will be employees of the
Shurgard REIT. To the extent the Shurgard REIT delegates, with the owner's
consent, responsibility for leasing, re-leasing or other leasing related
services to an independent contractor, the monthly management fee attributable
to gross revenues from any space leased as a result of such services will be
reduced to 3% of gross revenues of such leases.
The Management Agreements generally give the Management Company the right to
assign its management interest so long as the assignee assumes all of the
Management Company's management obligations under the applicable agreement. To
the extent a Management Agreement requires that the owner consent to the
assignment, the Management Company and the Shurgard REIT will seek such consent.
SHURGARD SERVICE MARK. In 1978, the Management Company registered the name
"Shurgard" and related service marks with the U.S. Patent and Trademark Office
to protect the exclusive use of such name and service marks in the United
States. Subsequently, the Management Company registered the mark in several
foreign jurisdictions. The Shurgard REIT's properties, as well as the other
properties managed by the Management Company, are operated under the common name
of "Shurgard" for the purpose of creating business goodwill and a recognizable
symbol in the self-storage industry. Use of the service mark "Shurgard" by the
Shurgard REIT and the owners of other properties managed by the Management
Company is governed by the terms of the respective Management Agreements
permitting the nonexclusive use of "Shurgard" and related trademarks and service
marks for the rental and operation of the properties. Upon termination of the
Management Agreements, the owners' right to use the service mark "Shurgard"
terminates, and signs bearing the name "Shurgard" are to be removed at the
owners' expense. In the event that a Management Agreement is terminated by the
Management Company for reasons other than the owner's breach thereof, or the
Management Company is terminated for cause, the owner has the right to the
continued use of the name "Shurgard" until its properties are sold or otherwise
disposed of. However, such rights may not be passed on to subsequent purchasers
of the properties. The Management Company has attempted to operate its managed
properties to enhance the goodwill associated with the name "Shurgard" and to
have the name represent a commitment to quality, consistency and reliability in
service. Through the Merger with the Management Company, the Shurgard REIT will
acquire all of the Management Company's rights to the "Shurgard" service mark,
subject to existing licenses covering Tennessee, Kentucky, portions of Florida,
Belgium, the Netherlands and Luxembourg and the contractual right of a
co-founder of the Management Company to use the Shurgard name with respect to
six properties.
56
<PAGE>
RELATIONSHIP WITH THE SHURGARD REIT
The following sections describe those investment advisory services and
property management services currently performed by the Management Company for
the Shurgard REIT. These arrangements will terminate upon the Closing. The
Management Company will not be entitled to any termination fee upon such
termination in connection with the Merger.
INVESTMENT ADVISORY SERVICES. The Shurgard REIT engages the Management
Company to provide certain investment advisory services pursuant to the terms of
an Advisory Agreement. The Management Company provides acquisition, development
and disposition services to the Shurgard REIT with respect to real property and
mortgage loans and performs the day-to-day administrative functions of the
Shurgard REIT, including internal and external reporting, shareholder relations
and supervision of stock registrar and transfer services. In consideration of
its investment advisory services, the Management Company is paid an annual
advisory fee equal to .5% of (i) the fair market value of properties acquired
subsequent to the Consolidation, (ii) the original principal balance, plus
accrued interest, of any mortgage loans made subsequent to the Consolidation,
and (iii) the average daily balance of the Shurgard REIT's cash equivalent
investments in excess of the amount of cash equivalent investments of the
Shurgard REIT immediately subsequent to consummation of the Consolidation. The
advisory fee is paid monthly, based on the annual operating budget approved by a
majority of the Shurgard REIT's directors, and is adjusted within 110 days after
the end of each fiscal year, with the unpaid balance of the fees, if any, paid
promptly to the Management Company and, in the event of overpayments, the
overage offset against the next estimated advisory fees payable to the
Management Company. For purposes of computing the Management Company's annual
advisory fee, during the initial term of the Advisory Agreement and the first
four renewal terms, the "fair market value" of the properties acquired
subsequent to the Consolidation will equal the purchase price paid by the
Shurgard REIT for those properties. Within 90 days prior to the commencement of
the fifth renewal term, and every two years thereafter, the Shurgard REIT will
have the properties acquired by it subsequent to the Consolidation appraised,
which appraised value will be used as the "fair market value" for purposes of
computing the annual advisory fee. The Management Company would also receive an
incentive advisory fee on the sale or refinancing of all property acquired
subsequent to the Consolidation (the "Additional Properties") equal to 10% of,
in the case of a sale, the excess of the sales price over the original purchase
price of the property (reduced by any prior incentive advisory fee payments out
of the net refinancing proceeds on such property) or, in the case of a
refinancing, the net cash proceeds realized by the Shurgard REIT as a result of
the refinancing.
The Management Company's receipt of the annual and incentive advisory fees
is subject to the limitation that the Shurgard REIT's annual total operating
expenses may not exceed the greater of (i) 2% of the average invested assets of
the Shurgard REIT for the year or (ii) 25% of the net income of the Shurgard
REIT for such year. In the event the Shurgard REIT's expenses exceed such
amount, the Management Company is required to remit to the Shurgard REIT that
portion of its advisory fee necessary to eliminate the excess amount.
The Advisory Agreement has a one-year term, but is automatically renewed for
additional one-year terms unless the Shurgard REIT notifies the Management
Company of its decision not to renew the Advisory Agreement at least 60 days
prior to the expiration of the initial or renewal term. In addition, either the
Shurgard REIT or the Management Company may terminate the Advisory Agreement
without cause upon 60 days' notice to the other party. The Shurgard REIT may
terminate the Advisory Agreement immediately if the Management Company commits
an act of fraud, embezzlement or theft or any act intentionally against the
interests of the Shurgard REIT that causes the Shurgard REIT material injury.
Either party may terminate the Advisory Agreement immediately if the other party
is found by a court to have breached the Advisory Agreement, has an involuntary
bankruptcy petition filed against it or commences a voluntary bankruptcy
proceeding. In the event the Shurgard REIT terminates the Advisory Agreement
without cause or does not renew it, the Management Company will receive a
termination fee equal to the annual advisory fee it received for the immediately
preceding year. In addition, in the event the Advisory Agreement is terminated
by the Shurgard REIT without cause, or the Shurgard REIT elects not to renew the
term of the Advisory
57
<PAGE>
Agreement for reasons other than cause, the Management Company may be entitled
to incentive advisory fees, since the Advisory Agreement treats the termination
as the liquidation of the Additional Properties. The Additional Properties are,
at the time of the Management Company's termination, deemed to have been sold at
a price equal to (i) their fair market value determined through an independent
appraiser selected by the Shurgard REIT and the Management Company or (ii) in
the event that such termination or expiration results from the merger,
consolidation, acquisition or liquidation of the Shurgard REIT, in an amount
equal to (a) the net aggregate consideration paid to the Shurgard REIT's
shareholders upon such occurrence plus the aggregate liabilities, to the extent
such liabilities are assumed by, or remain liabilities secured by assets
transferred to, the acquiring or surviving entity, multiplied by (b) the cash
flow from operations of the Additional Properties divided by the aggregate cash
flow from operations of all of the Shurgard REIT's properties. No later than 60
days after the termination, the Shurgard REIT will pay the Management Company
any incentive advisory fee resulting from the deemed liquidation of the
Additional Properties. Upon termination or renewal of the Advisory Agreement,
the Shurgard REIT must cease using the "Shurgard" name.
PROPERTY MANAGEMENT SERVICES. The Shurgard REIT also engages the Management
Company to manage the day-to-day operations of its properties pursuant to a
Management Agreement that has an initial five-year term. Such services include
the establishment of operational policies, the leasing, marketing, advertising,
maintenance and security of the facilities, and the employment of on-site
personnel, contract services, consultants, contractors and other professionals.
In consideration of its property management services, the Management Company
receives a monthly fee equal to 6% of the gross revenues from self-storage
operations and 5% of the gross revenues from office and business parks, and a
monthly advertising fee typically equal to $75 for each property. The Shurgard
REIT retains the right to terminate the Management Company as the property
manager with or without cause upon 60 days' written notice. The Management
Company also renders certain administrative services and certain acquisition and
development services to the Shurgard REIT for which it is reimbursed. Under the
Management Agreement, the Management Company granted the Shurgard REIT a
nonexclusive license to use the name, trademark and service mark "Shurgard" and
related marks, slogans and service items in the rental and operation of the
properties and in the name of the Shurgard REIT. Upon termination of the
Management Agreement, all use of the name "Shurgard" will terminate, subject to
the right to continue using the name at the property sites until the next
publication dates of the yellow page advertisements in the local markets where
the properties are located. Thereafter, the Shurgard REIT must cease using the
name and remove and replace all signage at the properties.
The Management Company had rented the facility located in downtown Seattle
to customers as both self-storage and records storage during the ownership of
the facility by the partnership which was a predecessor of the Shurgard REIT.
When the records storage operations were incorporated as InterMation in the
third quarter of 1993, the Management Company's rights and obligations to manage
the downtown Seattle facility were assumed by InterMation. InterMation has
continued to manage that facility since the Shurgard REIT began operations on
March 1, 1994, and has been compensated by the Management Company by a
pass-through of the management fee paid by the Shurgard REIT to the Management
Company. Upon the Closing of the Merger, the independent directors of the
Shurgard REIT will determine whether to continue management of the facility by
InterMation, in which case the Shurgard REIT will enter into an agreement with
InterMation to internalize management of the facility, or make other
arrangements. Any arrangement between the Shurgard REIT and InterMation
regarding the downtown Seattle facility will be subject to approval by the
independent directors under Section 12 of the Shurgard REIT's By-Laws. No
arrangements have been agreed to, and the independent directors, on January 25,
1995, expressed a desire to lease out the property at fair market value. For
1994, the downtown Seattle facility generated approximately $850,000 in gross
revenue for the Shurgard REIT, and management fee income of $51,000 to the
Management Company.
58
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Management Company should be
read in conjunction with "-- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial information
included elsewhere in this Proxy Statement/Prospectus.
MANAGEMENT COMPANY
SELECTED FINANCIAL INFORMATION (1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT OR FOR YEAR ENDED
DECEMBER 31, AT OR FOR
---------------------- NINE MONTHS ENDED
1991 1992 1993 SEPTEMBER 30, 1994
------ ------ ------ -------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues................... $6,418 $7,189 $8,048 $ 8,019
Excess of revenues over expenses..... 1,166 1,397 1,306 2,000
BALANCE SHEET DATA:
Total assets......................... $4,723 $4,432 $14,195 $11,453
Long-term debt....................... -- -- 7,275 7,275
<FN>
- ------------------------
(1) Per share data has not been included as the Management Company represents
only a portion of the historical business of Shurgard Incorporated.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Prior to the Merger, the Management Company will dispose of certain of its
assets that are unrelated to the property management, real estate and advisory
services that it performs, including InterMation and SRA. Accordingly, the
following discussions of results of operations reflect only the business of the
Management Company that is being acquired by the Shurgard REIT in the Merger and
do not reflect results of operations of InterMation or SRA.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1994. The
Management Company is a fully integrated real estate operating company that
specializes in all aspects of the self-storage industry. Revenues are generated
principally through property management services, rental revenues of owned
storage centers, real estate acquisition and development services, and advisory
and administrative services.
The following table shows comparative information as to the Management
Company's operations for the nine months ended September 30, 1993 and 1994.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1993 1994
------ ------
<S> <C> <C>
Revenues........................................................ $5,885 $8,019
Operating expenses.............................................. 5,204 5,798
------ ------
Excess from Management Company operations....................... 681 2,221
Other income (expense).......................................... 261 (221)
------ ------
Excess from Management Company.................................. $ 942 2,000
------ ------
------ ------
</TABLE>
For the nine months ended September 30, 1994, revenues over expenses
increased $1,058,000 to $2,000,000 compared to $942,000 for the nine months
ended September 30, 1993. This increase is primarily the result of improving
operating margins relating to the Management Company's property management
business and better utilization of the Management Company's real estate
department.
The Management Company generally receives a 6% property management fee for
managing storage properties owned by both affiliated and unaffiliated entities.
In the nine months ended September 30, 1994, the Management Company's property
management business improved by 52% or
59
<PAGE>
$809,000, compared to the same period in 1993. This increase primarily consisted
of $331,000 of fees related to new properties added in 1993 and 1994, increased
rental rates aggregating $318,000 for same stores and a $139,000 decrease in
operating expenses resulting from restructuring of the property management
department. Future improvement in the property management business is expected
to primarily come from the addition of new stores under management and rate
increases; however, the rate of improvement is expected to decrease.
In March 1994, the Management Company completed the consolidation of 17 of
the Shurgard partnerships into a REIT. Through the Consolidation, the Shurgard
REIT gained access to new capital, thereby providing the means to acquire and
develop additional self-storage centers. Under the Advisory Agreement between
the Management Company and the Shurgard REIT, the Management Company is
responsible for executing the Shurgard REIT's growth plan. The Shurgard REIT
reimburses the Management Company for costs incurred in acquiring and developing
storage centers on behalf of the Shurgard REIT. To date, the Management Company
has completed the acquisition of 20 storage centers, put together two joint
venture development transactions and negotiated participating mortgages on four
storage centers and ancillary commercial office space for the Shurgard REIT.
Most of the personnel dedicated to these transactions were employed in 1992 and
1993 and, as such, the reimbursement of their time had a direct effect on the
net earnings of the Management Company.
For the nine months ended September 30, 1994, revenues over expenses
increased $345,000 as a result of increased reimbursement of costs incurred by
the Management Company's acquisition and development department. Management's
efforts during 1993 focused on planning for the Consolidation; in anticipation
of this, the Management Company did not pursue other means of raising capital
for investment in new storage centers. Real estate investment activities in 1993
were limited primarily to the expansion and improvement of storage centers
currently managed by the Management Company and investing remaining commitments
obtained in 1991. As such, a lower percentage of department costs were
reimbursable in 1993.
Management fees for the nine months ended September 30, 1994 increased
$670,000 or 14.1% from $4,749,000 for the nine months ended September 30, 1993
to $5,419,000 for the same period in 1994. Same store management fees increased
7.3% and accounted for approximately one-half of the total increase. The
increase in same store management fees was primarily attributable to increased
rates at the stores under management. Occupancy levels as of September 30, 1994
and 1993 were 90%. As a result, the Management Company believes that future same
store management fee growth will come from increasing rates at the stores under
management.
From January 1, 1993 through September 30, 1994, the Management Company
added 43 stores under management, bringing its total stores under management to
252 as of September 30, 1994. Twenty-one of the new properties under management
were acquired for the Shurgard REIT, twelve were acquired for programs
previously sponsored by the Management Company and 10 are being managed for
unaffiliated owners. These 43 stores accounted for the remaining increase in
management fee revenues. Of the 43 stores added during 1993 and 1994, 20 were
added on September 1, 1994. As a result, these management fees were only $27,000
during 1994; these stores will have a more significant impact on management fees
during 1995.
Reimbursements from affiliates increased $736,000 or 69.3% from $1,062,000
for the nine months ended September 30, 1993 to $1,798,000 for the nine months
ended September 30, 1994. This increase is primarily attributable to the full
utilization of the Management Company's real estate department.
The Daly City storage center, purchased in December 1993, has provided
additional revenues of $776,000 for the nine months ended September 30, 1994.
This storage center, located near San Francisco, California, was purchased from
a nonaffiliated entity for $7,200,000 plus closing costs. The purchase was
funded with proceeds from a $7,275,000 nonrecourse participating mortgage note
payable to a commercial insurance company and cash. The nonamortizing mortgage
note, which matures January 1, 2004, is secured by a deed of trust on the
property and an assignment of leases and
60
<PAGE>
note requires monthly fixed interest payments of $48,500 at 8% per annum and
quarterly additional interest payments of 90% of net cash flow. As a result of
this participating mortgage, annualized interest expense increased to $528,000
from $6,000 for the nine months ended September 30, 1993. Although the
acquisition had a $75,000 book loss for the nine months ended September 30,
1994, the investment provided approximately $14,000 in operating cash flow after
payment of additional interest. Future interest payments are expected to be
funded through operating cash flow from the storage center.
September 30, 1994 personnel cost and general and administrative expenses
increased $592,000 or 13.1% from $4,517,000 for the nine months ended September
30, 1993 to $5,109,000 for the same period in 1994. Approximately 18% of this
increase is the result of adding real estate personnel to meet the Shurgard
REIT's acquisition and development goals for the year and approximately 55% of
the increased cost is related to operating the Daly City storage center,
purchased in December 1993, for the entire period of 1994.
RESULTS OF OPERATIONS--1992 VS. 1993. During 1992, the Management Company
determined that the formation of a self-administered REIT was the best
alternative for investors. Management's efforts during 1992 and 1993 focused on
the necessary planning for the Consolidation. Accordingly, the Management
Company did not pursue other means of raising capital for investment in new
storage centers. During 1993, the California Department of Corporations mandated
that the Consolidation could not be combined with the merger of the Management
Company. Acquisition and development activities in 1992 were limited to
investment of remaining capital from commitments obtained in 1991. Real estate
investment activities in 1993 focused on maximizing the revenue-generating
capabilities of storage centers managed by the Management Company through
expansion and facility improvements.
Revenues over expenses, exclusive of the $337,000 gain on the sale of land,
increased $246,000 or 23% from $1,060,000 for the year ended December 31, 1992
to $1,306,000 for the same period in 1993. This increase is primarily the result
of improving operating margins in the Management Company's property management
business, which were offset by a $185,000 lower contribution by the Management
Company's real estate department due to the factors discussed in the preceding
paragraph. As a result of adding new properties during the period, increased
operating margins, and increased property management fees from same stores, the
Management Company's property management business contributed an additional
$410,000 during 1993.
Management fees increased $818,000 or 14.5% from $5,630,000 for the year
ended December 31, 1992 compared to $6,448,000 for the same period in 1993. Same
store management fees increased by just under 10% and accounted for
approximately 61% of the total increase. Approximately 50% of the increase in
same store management fees came from rate increases, while the other 50% was the
result of occupancy increases at the stores under management. Occupancy levels
at December 31, 1993 were 88% compared to 85% at December 31, 1992.
During 1992 and 1993, the Management Company added 35 stores under
management, bringing its total stores under management to 231 as of December 31,
1993. Twenty-three of the new properties were acquired for programs previously
sponsored by the Management Company and the remaining 12 are being managed for
unaffiliated owners. The 35 stores accounted for the remaining increase in
management fee revenue.
Acquisition and development fees decreased $387,000 from $473,000 for the
year ended December 31, 1992 to $86,000 for the same period in 1993. This
significant decrease is the result of the Management Company's not pursuing new
capital for investment in storage centers as a result of the Consolidation
discussed above. Real estate activities in 1992 were limited to investing the
remaining capital from commitments obtained in 1991.
Reimbursements from affiliates increased $380,000 or 35% from $1,086,000 in
1992 to $1,466,000 in 1993. Of this increase, approximately 60%, or $217,000,
related to additional real estate investing activities that, in the absence of
investment capital to acquire or develop new stores, focused on
61
<PAGE>
maximizing the revenue-generating capabilities of existing storage centers
managed by the Management Company through store expansions and improvements. The
remaining increase in reimbursements was due to higher operating costs for which
the Management Company was reimbursed.
Personnel cost increased $455,000 or 10.5% from $4,348,000 for the year
ended December 31, 1992 compared to $4,803,000 for the year ended December 31,
1993. Approximately 70% of the increase related to higher personnel cost
attributable to property management personnel necessary to manage the additional
35 stores under management during 1992 and 1993.
General and administrative expenses and travel increased $243,000 or 15%
from $1,617,000 for the year ended December 31, 1992 compared to $1,860,000 for
the same period in 1993. Additional overhead was necessary to expand the
capacity of the Management Company's property management business to accommodate
the 35 stores added under management during 1992 and 1993. Additional expenses
were incurred during 1993 in preparation for the January 1994 opening of a
national telephone sales center.
Interest income increased $81,000 to $124,000 for the year ended December
31, 1993 as a result of the carrying cost incurred by the Management Company to
fund the cost of the Consolidation.
RESULTS OF OPERATIONS--1991 VS. 1992. Revenues over expenses increased
$231,000 or 20% from $1,166,000 for the year ended December 31, 1991 to
$1,397,000 for the same period in 1992. This increase was primarily the result
of a $337,000 gain on the sale of land held for investment, improved operating
contribution in the Management Company's property management business, a
$260,000 lower contribution by the Management Company's real estate department
due to the factors discussed above, and a net increase in administrative cost of
approximately $190,000.
The increase in administrative cost related primarily to various marketing
costs that in 1991 was paid for by public limited partnerships which the
Management Company sponsored. This cost was borne by the Management Company in
1992, as raising new investment capital was stopped to focus on the
Consolidation. As a result of improving margins, adding new properties during
the period and increased property management fees from same stores, the
Management Company's property management business contributed an additional
$340,000 in 1992.
Management fees increased $1,024,000 or 22.2% from $4,606,000 for the year
ended December 31, 1991 to $5,630,000 for the same period in 1992. Same store
management fees increased by 8.5% and accounted for approximately 35% of the
total increase. Approximately 50% of the increase in same store management fees
came from rate increases, while the other 50% was the result of occupancy
increases at the stores under management. Occupancy levels at December 31, 1992
were 85% compared to 81% at December 31, 1991.
During 1991 and 1992, the Management Company added 32 stores under
management, bringing its total stores under management to 209 as of December 31,
1992. Twenty-nine of the new properties were acquired for programs previously
sponsored by the Management Company and the remaining three are being managed
for unaffiliated owners. The 32 stores accounted for the remaining increase in
management fee revenue.
Acquisition and development fees and reimbursements decreased $253,000 or
14% from $1,812,000 for the year ended December 31, 1991 to $1,559,000 for the
same period in 1992. This decrease is primarily the result of the Management
Company's not pursuing new capital for investment in storage centers as a result
of the Consolidation. Real estate activities in 1992 were limited to investing
the remaining capital from commitments obtained in 1991.
Personnel cost increased $588,000 or 15.6% from $3,760,000 for the year
ended December 31, 1991 to $4,348,000 for the year ended December 31, 1992.
$370,000 or 63% of the increase related to higher personnel cost attributable to
the Company's property management business and the addition of 32 stores under
management during 1991 and 1992. An additional 14% or $80,000 related primarily
to marketing cost that the Management Company absorbed in 1992. This cost had
previously been paid by the public programs sponsored by the Management Company
in 1991.
62
<PAGE>
General and administrative expenses increased $300,000 or 33% from $918,000
for the year ended December 31, 1991 to $1,218,000 for the same period in 1992.
Approximately one-third of the increase is attributable to additional marketing
cost absorbed by the Company in 1992, as discussed above. Additionally, the
Company incurred a $110,000 charge related to a failed bid, conducted by the
Resolution Trust Corporation, on a package of performing and nonperforming
self-storage loans.
During 1992, the Management Company sold approximately 2.8 acres of land for
$1,425,000. As a result of the sale, the Management Company recognized a
$337,000 gain.
LIQUIDITY AND CAPITAL RESOURCES. In the nine months ended September 30,
1994, as well as in each of the three years in the period ended December 31,
1993, the Management Company's operations provided cash that was almost
completely utilized by investing and financing activities. Cash from operations
for the period ended September 30, 1994, increased to $1,619,000 after
decreasing from $1,793,000 in 1991 to $1,439,000 in 1993. These fluctuations
reflect changes in earnings adjusted by the timing of certain expense payments
and collections of due from affiliates. Cash balances are adequate to support
the operating needs of the Management Company.
In the nine months ended September 30, 1994, the Management Company's
investing activities consisted of receipt of $1,927,000 from the 17 partnerships
for costs incurred related to the Consolidation. Approximately $182,000 was
invested in a new storage center management software system which, when
completed in late 1995, the Management Company intends to license to its clients
under a lease arrangement. The completion of this system is expected to cost an
additional $400,000. In 1994, the Management Company's primary financing
activity consisted of $2,161,000 distributed to the other non-Management Company
businesses of Shurgard Incorporated, primarily InterMation. The Management
Company expects to distribute an additional $3 million to InterMation, funding
such commitment through its line of credit, which has $5 million available and
expires in June 1995. This line requires monthly payments of interest at prime
plus 0.5% (8.0% at September 30, 1994) and is secured by accounts receivable,
equipment and other assets of the Management Company. The agreement contains
restrictive covenants that, among other things, require that the Management
Company maintain minimum levels of working capital and tangible net worth and
prohibit the declaration or payment of dividends to shareholders without prior
consent.
In October 1994, the Management Company signed a letter of intent to invest
in Benelux SCS, a Belgian company that will develop and operate storage centers
in the Benelux region of Europe. Pursuant to that letter, the Management Company
has made a $250,000 working capital loan to Benelux SCS, which was funded from
operating cash flow, and has committed to loan an additional $500,000. This
additional investment will be funded primarily from the Management Company's
line of credit.
In the year ended December 31, 1993, the Management Company's investing
activities consisted of the incurring of $1,109,000 of costs, reimbursed in
1994, associated with the Consolidation and the investment of $734,000 in the
storage center management software system. Financing activities consisted
primarily of $588,000 distributed to non-Management Company businesses of
Shurgard Incorporated, primarily InterMation, and $249,000 of payments on the
line of credit.
In 1992, the investing activities of the Management Company were similar to
1993 except for the sale of a parcel of land in California to an unaffiliated
third party for $1,174,000. Financing activities included the distribution of
$1,033,000 to other non-Management Company businesses of Shurgard Incorporated,
which amounts were used to fund InterMation and treasury stock transactions.
The primary use of cash from operating activities in 1991 was the financing
of the distribution of $1,456,000 to other non-Management Company businesses of
Shurgard Incorporated, which amounts were used to fund InterMation and losses by
Shurgard's syndication business, and the payment of $100,000 on the line of
credit as well as a $231,000 investment in leasehold improvements at the
Management Company's offices.
63
<PAGE>
DISCUSSION OF PRO FORMA POST-MERGER OPERATIONS
The following is a discussion of operations after the proposed merger of the
Management Company into the Shurgard REIT as of and for the period ended
September 30, 1994. This discussion is based on the Unaudited Pro Forma
Post-Merger Balance Sheet at September 30, 1994 and the Post-Merger Statement of
Income for the nine months ended September 30, 1994, appearing on pages 11 and
12 of this Proxy Statement/Prospectus, respectively.
Upon the Merger, the Shurgard REIT will be a fully integrated, self-advised,
real estate operating company that specializes in all aspects of the
self-storage industry. The Shurgard REIT will acquire the Management Company's
rights to the Shurgard name, proprietary operating systems, interests in certain
partnerships and certain contractual rights, including the Management Company's
rights under third-party property and asset management agreements. Additionally,
the Shurgard REIT's key personnel will have in excess of 50 years of combined
experience in the self-storage industry.
The Shurgard REIT's total assets will increase $34,586,000 or 7.1% from
$484,774,000 pre-Merger to $519,360,000 post-Merger. The increase in total
assets is the result of acquiring a storage center in northern California (Daly
City), which the Management Company financed through a non-recourse
participating mortgage with a commercial insurance company. The estimated fair
market value of the storage center is $7,665,000. The remaining $26,921,000
represents primarily the excess of purchase price over tangible assets to be
recognized in connection with the Merger.
Total liabilities will increase $10,218,000 or 6.2% from $165,660,000
pre-Merger to $175,878,000 post-Merger. This increase is primarily the result of
the participating mortgage on the Daly City storage center. The note carries a
fixed interest of 8% plus 90% of the excess cash flow.
At September 30, 1994, the Company had accrued a $518,000 liability for 90%
of the increase related to the participating mortgage on the Daly City storage
center. The lender is entitled to 90% of any gain realized on sale. The payment,
however, is not triggered by the Merger, but would be payable if the property
were sold to a third party. Additionally, the Shurgard REIT anticipates
refinancing all outstanding borrowings on the Management Company's line of
credit. As of January 31, 1995, there was approximately $800,000 outstanding on
the Management Company's line of credit. Currently the Shurgard REIT has lines
of credit totaling $100,000,000 with $42,000,000 outstanding. At September 30,
1994, as a result of the Merger, the Shurgard REIT debt to total assets would
decline from 32% pre-Merger to 31.7% post-Merger, and its debt to equity would
decline from 48.6% pre-Merger to 47.9% post-Merger.
As a result of the Merger, the Shurgard REIT would assume various operating
leases entered into by the Management Company for corporate and district
offices. Future minimum lease payments under these non-cancelable operating
leases, which continue through 1998, total $1,488,000.
Assuming no change in its current revenues, the Shurgard REIT estimates that
for 1995 (assuming that the Merger is effective on March 31, 1995) and 1996
nonqualifying income would be approximately 4.9% and 5.75%, respectively, of
total gross income and would therefore fail in 1996 to meet the 95% test
necessary for continued qualification as a REIT for federal income tax purposes.
See "FEDERAL INCOME TAX CONSEQUENCES -- Consequences of the Merger on the
Shurgard REIT's Qualification as a REIT -- Nonqualifying Income." Acquisition of
additional properties and development of new properties will, however, reduce
the amount of such excess by increasing the Shurgard REIT's gross income. In
this regard, the Shurgard REIT's current business plan provides for external
growth through acquisitions and internal growth through development of new
properties. See "SHURGARD STORAGE CENTERS, INC. -- Business." There can be no
assurance, however, that the acquisition of additional properties or the
development of new properties will occur on such a scale or within such time
periods that nonqualifying income will meet the 95% test for 1996 or future
years. For this reason, the Shurgard REIT also intends to monitor nonqualifying
income carefully and, if necessary, defer or forgive income from third-party
management arrangements or other sources of
64
<PAGE>
nonqualifying income to the extent necessary to comply with tax requirements.
The Company estimates that the maximum amount of annual income for 1996 thereby
affected would be approximately $600,000, which amount would decline as
acquisition and development activities increase the Company's gross income.
Actual excess nonqualifying income will also vary depending on operating
results.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1994 PRE-MERGER
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1994 POST-MERGER. Net income before
extraordinary item increased $1,211,000 or 7.2% from $16,713,000 pre-Merger to
$17,924,000 post-Merger. This increase is primarily the result of (a) a
$1,189,000 increase in net income before extraordinary item attributable to the
elimination of management fees charged by the Management Company, reduced by the
substitution of the Management Company's actual direct cost to manage these
properties, (b) a $867,000 increase in net income before extraordinary item
attributable to the Management Company's third-party management services, and
(c) a $835,000 increase in depreciation and amortization resulting primarily
from the amortization of the excess of the purchase price over tangible assets
contributed by the Management Company.
Property net operating income (rental income less cost of operations)
increased $1,493,000 or 4.2% as a result of the elimination of management fees
on storage centers owned by the Shurgard REIT and the acquisition of the Daly
City storage center previously owned by the Management Company. Rental revenues
post-Merger for the nine months ended September 30, 1994 increased $776,000 as a
result of the Daly City self-storage center owned by the Management Company.
The Shurgard REIT's revenues are generated principally through the operation
of its self-storage centers. Upon the Merger, the Shurgard REIT will also
provide property management and administrative services to 91 additional
self-storage properties, some affiliated and others unaffiliated with the
Management Company. The fees generated from these services for the nine months
ended September 30, 1994 included management fees of $1,890,000, equity in
earnings of affiliated partnerships of $226,000 and reimbursements of $441,000.
Upon the Merger, the Shurgard REIT's rental revenues from owned storage centers
will represent approximately 96% of its total revenues and the remaining 4% of
total revenues will be from properties managed by the Shurgard REIT.
The Shurgard REIT will receive management fees generally equal to 6% of
revenues generated by the properties it manages. The 91 properties the Shurgard
REIT will manage after the Merger are principally located in the markets where
the Shurgard REIT currently has existing operations. These properties were
acquired by various public and private programs previously sponsored by the
Management Company, and by unaffiliated owners. The Shurgard REIT will become
the general partner in two programs owning 11 properties and will have a limited
partner interest in five partnerships which are the general partners of five
programs that own a total of 43 properties. The programs in which the Management
Company, directly or indirectly, owns a partner interest had total assets as of
September 30, 1994 of $9.5 to $38.1 million, indebtedness levels of $0 to $12.3
million, and (with the exception of one program, which is not yet making
distributions) distributions to its limited partners of 6.5% to 10.0%
annualized. Because the Management Company's shareholders are entitled to
receive additional shares of Shurgard Class A Common Stock in the future based
on the extent to which, during the five years following the Closing, the
Shurgard REIT realizes value as a result of certain transactions relating to six
of the partnership interests acquired by the Shurgard REIT from the Management
Company in the Merger, or based on the value, at the end of five years or in the
event of a change in control, of any remaining interests in such partnerships,
the benefit to the Shurgard REIT of acquiring such partnership interests is
limited to distributions from operating cash flow of such partnerships. See "THE
MERGER -- Contingent Shares." In the future, management fees are expected to
grow consistently with the Shurgard REIT's existing same store portfolio, with
most of this growth anticipated to come from increasing rates. The Shurgard REIT
expects to continue to add some third-party management contracts to complement
its existing network. These contracts are not expected to create material
amounts of nonqualifying income.
65
<PAGE>
Equity in earnings of affiliated partnerships relates to the limited and
general partnership interests that the Management Company has in six programs.
Under the partnership agreements, the Shurgard REIT will be entitled to 1% to 5%
of the available cash flow from the various partnerships.
Reimbursements from affiliates relates to certain administrative cost
reimbursable by the Management Company's affiliated programs. These
reimbursements include primarily asset management and legal services performed
on behalf of the affiliated programs.
Under the terms of its advisory agreement, the Management Company is
entitled to a 50 basis point fee for properties acquired or developed on behalf
of the Shurgard REIT. This fee will be eliminated upon the Merger.
Property operating expenses decreased $717,000 or 3.2% as a result of the
elimination of management fees and the substitution of the Management Company's
actual cost to operate the properties owned by the Shurgard REIT. No material
change in management compensation is expected in 1995.
Depreciation and amortization increased $835,000 or 8.6% from $9,740,000
pre-Merger to $10,575,000 post-Merger. This increase is the result of the
depreciation related to the Daly City storage center and the amortization of the
excess of the purchase price over the Management Company's tangible assets.
Interest expense increased $671,000 or 8.5% from $7,931,000 pre-Merger to
$8,602,000 post-Merger. Approximately 80% of the increase is related to the
participating mortgage on the Daly City storage center. This mortgage carries
interest at 8% plus 90% of the excess cash flow. As a result, the interest
expense attributable to the Daly City property will vary based upon the annual
operating results of the storage center. The remaining 20% of the increase in
interest expense is due to the interest expense on the outstanding borrowings
under the Management Company's line of credit.
General and administrative expenses increased $1,426,000 or 67% from
$2,133,000 pre-Merger to $3,559,000 post-Merger. This increase reflects, in
part, the presentation of the costs of administering the Shurgard REIT, the
Partnerships and third-party properties as general and administrative expenses.
Pre-Merger, these costs were paid by the Management Company out of property
management fees. Reimbursements by the affiliated and unaffiliated owners funded
$441,000 of the increase. Management believes that these costs, net of
reimbursements, are indicative of the level of expenses that will be incurred in
the future.
66
<PAGE>
THE MERGER
THE DESCRIPTION OF THE MERGER AGREEMENT SET FORTH BELOW DOES NOT PURPORT TO
BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX I TO THIS PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE.
TERMS OF THE MERGER
THE MERGER. Subject to the terms and conditions of the Merger Agreement,
the Management Company will merge with and into the Shurgard REIT at the
Effective Time. The separate corporate existence of the Management Company will
then cease, and the internal corporate affairs of the Shurgard REIT (the
"Surviving Corporation") will continue to be governed by the laws of the state
of Delaware.
CERTIFICATE OF INCORPORATION AND BY-LAWS. The Merger Agreement provides
that the Shurgard REIT's Certificate of Incorporation and By-Laws in effect
immediately before the Effective Time will be the Certificate of Incorporation
and the By-Laws of the Surviving Corporation.
CONVERSION OF MANAGEMENT COMPANY COMMON STOCK IN THE MERGER. At the
Effective Time, all the issued and outstanding shares of Management Company
Common Stock (except shares as to which dissenters' rights are exercised and are
not subsequently withdrawn) will be converted into (i) an aggregate of 1,400,000
shares of Shurgard Class A Common Stock, reduced pro rata based on shares as to
which dissenters' rights have been duly exercised and not subsequently withdrawn
and subject to certain adjustments as described below (the "Share
Consideration") and (ii) the right to receive additional shares of Shurgard
Class A Common Stock (the "Contingent Shares") based on (a) the extent to which,
during the five years following the Closing, the Shurgard REIT realizes value as
a result of certain transactions relating to interests in or assets of six
limited partnerships acquired by the Shurgard REIT in the Merger and (b) the
value, at the end of five years or in the event of a change of control, of any
remaining interests in such partnerships as determined by independent appraisal.
DIRECTORS AND OFFICERS. As a result of the Merger, at the Effective Time
the directors of the Surviving Corporation will be the existing four directors
of the Shurgard REIT plus Charles K. Barbo, each to serve until his successor
has been duly elected or appointed and qualified or until his earlier death,
resignation or removal. In addition, the officers of the Surviving Corporation
will be the officers of the Shurgard REIT plus Charles K. Barbo, who will serve
as the Chairman of the Board, President, and Chief Executive Officer. Harrell L.
Beck, who is currently President, will serve as Senior Vice President, Chief
Financial Officer, and Treasurer and Kristin H. Stred, who is currently
Secretary and General Counsel, will serve as Senior Vice President, Secretary
and General Counsel. Each will serve until a successor has been duly elected or
appointed and qualified or until his or her earlier death, resignation or
removal.
ADJUSTMENTS TO SHARE CONSIDERATION
The Share Consideration will be subject to adjustment in the event that, as
of the Closing, the product obtained by multiplying the Share Consideration by
the then Market Value (as hereinafter defined) of the Shurgard Class A Common
Stock equals or exceeds $31,165,000 (the "Upper Limit"). In such case, the Share
Consideration will be adjusted and reduced to that number of shares of Shurgard
Class A Common Stock obtained by dividing the Upper Limit by the Market Value of
Shurgard Class A Common Stock as of the Closing.
References to Market Value with respect to a specified date means the
average of the daily closing price for the Shurgard Class A Common Stock for
each of the 30 trading days preceding such date. On January 24, 1995, the Market
Value was $20.70 per share of Shurgard Class A Common Stock.
In addition, the Share Consideration will be subject to adjustment based on
certain increases or decreases in the Management Company's equity based on a
comparison of a Management Company statement of assets and liabilities as of
October 31, 1994 (the "October Statement") with a statement
67
<PAGE>
of assets and liabilities as of a date within five days preceding the Closing
(the "Closing Statement"). In the event that there has been a reduction in the
Management Company's equity from that set forth in the October Statement, the
Share Consideration will be reduced by the quotient obtained by dividing such
reduction by the Market Value of the Shurgard Class A Common Stock as of the
Closing. If there has been an increase in the Management Company's equity
compared to the October Statement, the Share Consideration will be increased by
the quotient obtained by dividing such increase by the Market Value of the
Shurgard Class A Common Stock as of the Closing, subject to a $1,500,000 cap.
Within 30 days following the Closing, Deloitte & Touche LLP will conduct an
audit of the Closing Statement (the "Final Statement"), with any further
reductions to the Management Company's equity resulting in the return of
Shurgard Class A Common Stock, computed on the same basis, from the Adjustment
Indemnification Shares (as defined below) and, if required, the Indemnification
Shares referred to below. To the extent the Final Statement reflects any further
increases to the Management Company's equity, the Shurgard REIT will be
obligated to issue additional shares of Shurgard Class A Common Stock, computed
on the same basis, pro rata to the Management Company shareholders.
Between October 31, 1994 and the Closing Date, the Management Company
expects to contribute up to approximately $2.6 million in working capital to
InterMation prior to the InterMation Spin-off. To finance the contribution, the
Management Company expects to incur indebtedness under its line of credit, which
would be assumed by the Shurgard REIT in the Merger. This contribution would
also have the effect of reducing the Management Company's equity, as reflected
in the Closing Statement, below that reflected in the October Statement, thereby
reducing the Share Consideration below 1,400,000 shares.
The Share Consideration, before adjustments, was determined without taking
into account the 282,572 shares of Shurgard Class A Common Stock currently owned
by the Management Company, and the October Statement, which will be used as a
reference for calculating changes in the Management Company's equity at the
Closing, does not include any of such shares. The Management Company currently
anticipates that all of such shares will be acquired by the Shurgard REIT in the
Merger and therefore will be included in the Closing Statement, valued at their
Market Value as of the Closing. The inclusion of such shares in the Closing
Statement will increase the Share Consideration on a share-for-share basis.
Completion of the Merger will, however, result in the cancellation of the shares
acquired by the Shurgard REIT in the Merger, thereby offsetting such increase in
Share Consideration. In the event that all or a portion of such shares are
distributed to the shareholders of the Management Company or otherwise
transferred to a third party, they will not be included in the Closing Statement
and, accordingly, will not increase the Share Consideration.
INDEMNIFICATION SHARES
As part of the Merger, 10% of the Share Consideration, net of the Shurgard
Class A Common Stock acquired by the Shurgard REIT in the Merger, will be
deposited in escrow (the "Indemnification Shares"). The Indemnification Shares
will be deducted pro rata from that portion of the Share Consideration otherwise
issuable to each of the Management Company shareholders and will be held in
escrow for three years from the Closing Date. Following the expiration of such
term, any remaining Indemnification Shares will be released and returned to the
Management Company shareholders. While the indemnification escrow is in place,
the Shurgard REIT will, subject to a claims threshold of $50,000 and certain
indemnity exceptions, be entitled to recover from the Indemnification Shares the
full dollar amount of any provable or ascertainable loss, liability, damage,
cost, obligation or expense incurred by the Shurgard REIT (net of any benefits,
insurance or other recoveries received or entitled to be received by the
Shurgard REIT with respect thereto) as a result of (i) any breach of
representation or warranty made by the Management Company in the representation
and warranty section of the Merger Agreement, (ii) any breach by the Management
Company of any covenant or agreement on its part contained in the Merger
Agreement, (iii) certain tax liabilities that may be incurred in connection with
the InterMation Spin-off, (iv) subject to the procedures set forth below with
respect to
68
<PAGE>
Adjustment Indemnification Shares, the full dollar amount of any reduction in
Management Company equity as reflected on the Final Statement when compared to
the Closing Statement (an "Overstatement") (as well as any overstatement of any
tax refund (the "Refund") due the Management Company as a result of its short
taxable year ending on the Effective Date), and (v) liabilities and associated
costs suffered by the Shurgard REIT in its capacity as general partner of the
Partnerships (as defined below) to the extent arising out of facts and
circumstances in existence prior to the Closing Date, net of certain interim
distributions by the Partnerships. Notwithstanding the three-year escrow term,
indemnification with respect to matters except employee stock ownership plans
and certain tax liabilities will terminate two years after the Closing. The
determination of the number of Indemnification Shares to be transferred to the
Shurgard REIT incident to an indemnification claim will be based upon the Market
Value of the Shurgard Class A Common Stock as of the Closing.
Notwithstanding the foregoing, the Shurgard REIT will, under the terms of
the indemnification, continue to have recourse severally against the former
Management Company shareholders with respect to certain tax liabilities that may
be incurred in connection with the InterMation Spin-off, which will remain in
effect until the expiration of all applicable statutory periods of limitation.
The dollar value of such claims made against the Management Company shareholders
is, however, limited to the product obtained by multiplying the number of
Indemnification Shares released to the shareholders by the Market Value of
Shurgard Class A Common Stock as of the Closing.
An additional 5% of the Share Consideration, net of the Shurgard Class A
Common Stock acquired by the Shurgard REIT in the Merger (the "Adjustment
Indemnification Shares"), will be deposited in escrow for a period ending 10
days following the later of (i) the final determination of any Overstatement and
(ii) the date on which the Refund is received by the Shurgard REIT or the date
on which the Shurgard REIT receives notice that the Refund will not be paid. The
Adjustment Indemnification Shares will be deducted pro rata from that portion of
the Share Consideration otherwise issuable to each of the Management Company
shareholders. The Shurgard REIT's only rights with respect to the Adjustment
Indemnification Shares will be recovery of (i) any Overstatement and (ii) the
difference between any Refund claimed (as set forth in the Closing Statement)
and the actual amount received. Any amounts recoverable over and above the value
of the Adjustment Indemnification Shares will be recoverable against the
Indemnification Shares, as described above. At the termination of the Adjustment
Indemnification Share period, any Adjustment Indemnification Shares not required
to reimburse the Shurgard REIT will be released to the Management Company
shareholders.
CONTINGENT SHARES
The Management Company owns partnership interests in six limited
partnerships (the "Partnerships") that are being acquired by the Shurgard REIT
in the Merger. The Partnerships either own self-storage centers (the
"Partnership Facilities") or direct or indirect interests in partnerships (the
"Project Partnerships") that in turn own Partnership Facilities. The partnership
agreements (the "Partnership Agreements") that govern the Partnerships and the
Project Partnerships provide for allocation of distributions from the sale or
refinancing of partnership assets and Partnership Facilities among the various
partners based on a variety of formulas, as described in the table presented
below. In many cases, the level of distributions to the Management Company
depends on satisfying prior distribution requirements to other partners,
primarily returns of capital and preferred returns.
The amounts that the Management Company may ultimately realize from the
Partnerships cannot be calculated with certainty at this time and will depend on
a number of factors, including, among others (i) the timing of sales of
Partnership interests or Partnership Facilities, (ii) the financial performance
of the Partnership Facilities during the period prior to such sale, including
the net operating income of the Partnership Facilities, (iii) the allocation of
interim distributions among the Management Company and other partners, in
accordance with the terms of their respective Partnership Agreements, (iv)
changes in such allocation arrangements depending on the satisfaction of certain
capital and preferred return requirements to which partners other than the
Management Company are entitled, (v) capitalization rates typically applied to
net operating income at the time of
69
<PAGE>
sale in order to price the Partnership Facilities, (vi) the individual
circumstances of the Partnership Facility or the Project Partnership that affect
sale price and timing, and (vii) changes in general economic conditions that
could affect net operating income, cash flows, capitalization rates and sales
prices of the Partnership Facilities.
Due to these factors, the Shurgard REIT concluded that it would be difficult
to value the Management Company's interests in the Partnerships on a current
basis and, instead, proposed that the Management Company shareholders receive
additional consideration to the extent that Partnership interests or Partnership
Facilities were sold and the Shurgard REIT received gross proceeds thereof in
accordance with the Partnership Agreements or, at certain times, the Partnership
Facilities were treated as if they had been sold for values established by
independent appraisal and the gross proceeds were deemed distributed in
liquidation. In this way, the Shurgard REIT would defer issuance of additional
shares into the future, when the value of the Partnership interests would
actually be realized or when that value was likely to be more clearly
established through longer periods of operation of the Partnership Facilities.
In the meantime, the Shurgard REIT would be entitled to all Partnership
distributions from the operating cash flow of the Partnership Facilities,
without payment of further consideration.
In accordance with these general principles, the Merger Agreement provides
that, in addition to the Share Consideration, the Management Company
shareholders will receive additional consideration in the form of Contingent
Shares to be issued by the Shurgard REIT based on the Profits (as described
below), if any, arising from the Shurgard REIT's interests in the Partnerships.
Contingent Shares will be issued as a result of the following events: (i) the
receipt of proceeds by the Shurgard REIT from the sale or other disposition by
the Shurgard REIT of all or any part of its interests in the Partnerships (a
"Disposition"); (ii) the receipt by the Shurgard REIT of any distribution from a
Partnership attributable to the sale, refinancing, liquidation or other
disposition by a Partnership or a Project Partnership of one or more of its
Partnership Facilities or attributable to the sale by a Partnership (or by any
Project Partnership that is itself an owner of an interest in a Project
Partnership) of all or any part of its interest in a Project Partnership (a
"Distribution"); or (iii) a deemed liquidating distribution from a Partnership
to the Shurgard REIT on the fifth anniversary date of the Closing Date or as a
result of a change of control of the Shurgard REIT (a "Deemed Distribution").
The Partnership interests subject to this Contingent Share arrangement and
their respective interests in the Project Partnerships are described below. The
Shurgard REIT will acquire these Partnership interests and thereby will be
entitled to the payments of Partnership operating cash flow following the
Merger. For a description of the number and size of Partnership Facilities owned
by the respective Partnerships or Project Partnerships, see "SHURGARD
INCORPORATED -- Management Services."
<TABLE>
<CAPTION>
PARTNERSHIP DESCRIPTION INTEREST DESCRIPTION
- --------------------------- --------------------------------------------- ---------------------------------------------
<S> <C> <C>
Shurgard Partners L.P. Shurgard Partners L.P., a Washington limited The Management Company is entitled to all
partnership, is the general partner in proceeds from Shurgard Partners L.P.,
Shurgard Institutional Fund L.P., a including all proceeds received from Shurgard
Washington limited partnership formed in Partners L.P.'s interest in Fund I after
March 1989 and financed exclusively with Shurgard Partners L.P.'s general partners
public and private pension funds ("Fund I"). receive an amount equal to 1% of all
The Management Company is the sole limited available cash flow of Fund I. Generally,
partner in Shurgard Partners L.P. Shurgard Partners L.P.'s interest in Fund I
entitles it to the following allocation of
proceeds from a sale or refinancing of Fund I
assets:
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP DESCRIPTION INTEREST DESCRIPTION
- --------------------------- --------------------------------------------- ---------------------------------------------
<S> <C> <C>
(a) 6% of available cash flow from Fund I
until the Fund I limited partners receive a
return of their remaining invested capital
equal to approximately $18,000,000 as of
December 31, 1994;
(b) After the Fund I limited partners next
receive an 8% preferred return on their
invested capital, Shurgard Partners L.P. is
entitled to distributions in amounts
necessary to cause it to have received 20% of
the total amount distributed after the
limited partners have received a return of
their invested capital; and
(c) Thereafter, 20% of all remaining
available cash flow.
Shurgard Partners L.P. II Shurgard Partners L.P. II, a Washington The Management Company will be entitled to
limited partnership, is the general partner all proceeds from Shurgard Partners L.P. II,
in Shurgard Institutional Fund L.P. II, a including all proceeds received from Shurgard
Washington limited partnership formed in Partners L.P. II's interest in Fund II after
January 1991 and financed exclusively with Shurgard Partners L.P. II's general partners
public and private pension funds ("Fund II"). receive an amount equal to 1% of all
The Management Company will own all of the available cash flow of Fund II. Generally,
limited partner interests in Shurgard Shurgard Partners L.P. II's interest in Fund
Partners L.P. II prior to the Merger. II entitles it to the following allocation of
proceeds from a sale or refinancing of Fund
II assets:
(a) After the Fund II limited partners
receive a return of their remaining invested
capital equal to approximately $7,300,000 as
of December 31, 1994 plus an 8% preferred
return, Shurgard Partners L.P. II is entitled
to distributions in amounts necessary to
cause it to have received 20% of the total
amount previously distributed to the limited
partners from such sale or refinancing; and
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP DESCRIPTION INTEREST DESCRIPTION
- --------------------------- --------------------------------------------- ---------------------------------------------
<S> <C> <C>
(b) Thereafter, 20% of all remaining
available cash flow.
Shurgard Associates L.P., The IDS Partnerships, each a Washington The Management Company is entitled to
Shurgard Associates L.P. II limited partnership, hold general partner proceeds from the IDS Partnerships depending
and Shurgard Associates interests in IDS Shurgard Income Growth upon the amount of proceeds received by the
L.P. III (the "IDS Partners L.P., IDS Shurgard Income Growth IDS Partnerships from the IDS Funds.
Partnerships") Partners L.P. II and IDS Shurgard Income Generally, the IDS Partnerships are entitled
Growth Partners L.P. III, respectively (the to receive 5% of distributable sales proceeds
"IDS Funds"). The IDS Funds were formed in from the IDS Funds until the limited partners
1988, 1989 and 1990, respectively. The of the IDS Funds receive a return of their
Management Company holds a limited partner remaining invested capital plus a 9%
interest in each of the IDS Partnerships. preferred return. The limited partners'
remaining invested capital as of December 31,
1994 for each of the IDS Funds is
approximately $23,300,000, $20,200,000 and
$23,500,000, respectively. Thereafter, the
IDS Partnerships receive 20% of distributable
sales proceeds from the IDS Funds.
The Management Company will receive from the
IDS Partnerships 40% of all IDS Fund
distributions received by the IDS
Partnerships pursuant to the 5% distribution
provision described above. Thereafter, the
Management Company will receive from the IDS
Partnerships 45% of IDS Fund distributions
received by the IDS Partnerships.
Shurgard Evergreen Limited The Management Company is the general partner The Management Company is generally entitled
Partnership in Shurgard Evergreen Limited Partnership. to 20% of all cash flow distributions after
This partnership directly owns self-storage the limited partners receive a return of
facilities and is a partner with Fund II in their remaining invested capital equal to
Shurgard Institutional Partners. approximately $22,700,000 and a 9% preferred
return.
</TABLE>
Generally, in the event of a Disposition, Distribution or Deemed
Distribution, Profits will be determined as follows:
(i) The Profits pursuant to a Disposition will consist of the gross
proceeds received by the Shurgard REIT from such Disposition, net of the
carrying value of the respective Partnership
72
<PAGE>
interest on the Final Statement and the Shurgard REIT's reasonable costs and
legal and accounting expenses incurred in connection with such Disposition,
provided that, in the event of a Disposition to an affiliate of the Shurgard
REIT, the gross proceeds received by the Shurgard REIT will be deemed to be
the greater of (x) the portion of the amount, determined by appraisal, that
would have been distributed to the Shurgard REIT had there been a Deemed
Distribution as of the date of such Disposition or (y) the actual gross
proceeds received by Shurgard REIT with respect to such Disposition.
(ii) The Profits received upon a Distribution will be calculated with
reference to the amounts actually received by the Shurgard REIT with respect
to such Distribution, provided that, in the event a Partnership Facility or
interest in a Project Partnership is acquired directly by the Shurgard REIT
or an affiliate thereof, the amount received by the Shurgard REIT will be
deemed to be the greater of (x) the portion of the amount, determined by
appraisal, that would have been distributed to the Shurgard REIT had there
been a Deemed Distribution as of the date of such acquisition; (y) the
actual amount received by the Shurgard REIT with respect to such
Distribution; or (z) the amount of any credit toward the purchase price for
the Partnership Facility afforded the Shurgard REIT in exchange for
cancellation of its interest in the Partnership.
(iii) The Profits received upon a Deemed Distribution will be calculated
with reference to the amounts the Shurgard REIT would have received pursuant
to the terms of the respective Partnership Agreement had such Partnership
and the Project Partnership, if any, in which such Partnership may hold an
interest liquidated the Partnership Facilities for an amount determined by
appraisal, less reasonable costs and legal, accounting and appraisal
expenses incurred.
The number of Contingent Shares, if any, to be issued by the Shurgard REIT
in a Disposition or Distribution will be determined on a quarterly basis by (i)
multiplying the Profits received in connection with a Disposition or
Distribution occurring in such quarter by 95% and (ii) dividing such product by
the Market Value as of the last business day of such fiscal quarter.
The number of Contingent Shares, if any, to be issued by the Shurgard REIT
in a Deemed Distribution will be determined at the time of a change of control
or at the end of five years from the Closing, as the case may be, by reference
to independent appraisals of the Partnership Facilities and assuming a
liquidation of the Project Partnerships. The resulting Profits deemed received
by the Shurgard REIT will be multiplied by 95% and divided by the Market Value
as of the date of the applicable event to determine the number of Contingent
Shares.
The number of Contingent Shares so determined will be issued pro rata to
those who were Management Company shareholders immediately prior to the
Effective Time.
As indicated above, the Profits received or deemed to be received by the
Shurgard REIT cannot be computed on a current basis because they depend on
future economic conditions and future events. To demonstrate how the Contingent
Share provisions could work, however, the Shurgard REIT has prepared three
examples based on the following assumptions: (i) the net operating incomes of
the Partnership Facilities and the related partnership distributions increase by
4% annually based on the estimated net operating income of the Partnership
Facilities for the year ended December 31, 1994, (ii) all Partnership Facilities
are sold in a single transaction as of a specified date at sale prices based on
a capitalization rate of 10.5% of net operating income, (iii) a selling cost of
5% of the sale price is incurred, (iv) the estimated net operating income of
Partnership Facilities for the year ended December 31, 1994 is based on the 1994
budgets for such Partnership Facilities (which are consistent with the net
operating income for the 11 months ended November 30, 1994), except Partnership
Facilities that are still in the rent-up stage, in which case the net operating
income has been appropriately increased, and (v) for purposes of applying the
allocation provisions of the Partnership Agreements, the aggregate capital
contributions received by the Partnerships and the Project Partnerships and the
cumulative partnership distributions made by such partnerships as of December
31, 1994 have been estimated based on the unaudited amounts as of November 30,
1994. The Shurgard REIT believes, however, that it is likely that the
Partnership Facilities will actually be sold at different times, that net
73
<PAGE>
operating incomes will vary over time based on changes in economic conditions,
typical capitalization rates will change and negotiated sale prices will be
affected by individual circumstances. Nevertheless, based on such assumptions
and assuming the distribution of sale proceeds in accordance with the provisions
of the respective Partnership Agreements, Profits resulting from the sale of all
Partnership Facilities at December 31, 1995, 1997 and 1999 would be
approximately $2.7 million, $5.6 million and $11 million, respectively. Based on
a Market Value of the Shurgard Class A Common Stock of $18.78 per share (the
average price for the 30 days ended December 16, 1994), the number of Contingent
Shares issuable at such dates in the future would be 136,581 shares, 283,280
shares and 556,443 shares, respectively. Since the Market Value at these future
dates could be substantially different from the current Market Value, the number
of Contingent Shares could vary accordingly and would not be issuable until such
future dates. It is important to understand that neither the timing nor the
terms of sale transactions involving the Partnership Facilities or Partnership
interests can be predicted and that the foregoing examples are only
illustrative.
In the event of a change of control or at the end of five years following
the Closing, the Shurgard REIT may issue Contingent Shares based on the value of
all of the unsold Partnership Facilities determined by appraisal, but without
actual sale transactions and without receiving distributions from the
Partnerships or recognizing gain or income for financial reporting or tax
purposes. While the Shurgard REIT would continue to own the Partnership
interests and would benefit from additional appreciation in the value of the
Partnership Facilities after such appraisal, if any, it would recognize gain or
income and receive sales proceeds in the future only in connection with an
actual sale of such assets.
All distributions or other payments (to the extent such distributions or
other payments do not constitute a Disposition or Distribution) and all voting
rights and other indicia of beneficial ownership with respect to such
Partnerships will inure to the benefit of the Shurgard REIT. Accordingly, the
Shurgard REIT will receive and retain all distributions from the Partnership
attributable to operating cash flow. For the 11 months ended November 30, 1994,
this was $295,000. Dividends or other distributions and all voting rights and
other indicia of beneficial ownership with respect to Contingent Shares will
inure to the benefit of the former holder of Management Company Common Stock
only when and from the time that such Contingent Shares are issued, if ever, in
accordance with the provisions of the Merger Agreement. The rights to Contingent
Shares are not assignable.
No fractional Contingent Shares will be issued. In lieu of any such
fractional securities, each holder of rights to Contingent Shares who would
otherwise have been entitled to a fraction of a Contingent Share will be paid an
amount in cash, without interest, equal to the Market Value of one Contingent
Share (as calculated above), multiplied by such fraction.
In light of certain IRS guidelines, the parties have agreed in the Merger
Agreement that the aggregate number of shares of Shurgard Class A Common Stock
delivered by the Shurgard REIT as Contingent Shares shall not exceed that number
of shares of Shurgard Class A Common Stock issued at the Effective Time. The
parties, however, do not believe that this maximum limit will ever be reached
and this limit does not represent an estimate by the parties of the payment of
the Contingent Shares.
EFFECTIVE TIME OF THE MERGER
Promptly following the satisfaction or waiver (where permissible) of the
conditions to the Merger, the Merger will be consummated and become effective on
the date and at the time the certificate of merger is duly filed with the
Secretary of State of the state of Delaware and the articles of merger are duly
filed with the Secretary of State of the state of Washington or such later date
and time as may be specified in such certificate of merger and articles of
merger. See "THE MERGER -- Conditions to Consummation of the Merger."
74
<PAGE>
FRACTIONAL SHARES
No fractional shares of Shurgard Class A Common Stock will be issued in the
Merger. In lieu thereof, the Shurgard REIT will pay cash based on the Market
Value of Shurgard Class A Common Stock immediately preceding the Closing to any
holder otherwise entitled to a fractional share.
EXCHANGE OF SHARES OF MANAGEMENT COMPANY COMMON STOCK
The Merger Agreement provides that the exchange of shares of Management
Company Common Stock in the Merger will be effected as follows:
(i) The Shurgard REIT will deliver to each holder of record of a certificate
or certificates that immediately prior to the Effective Time represented
outstanding shares of Management Company Common Stock (the "Certificates") a
form of letter of transmittal and instructions for use in effecting the
surrender of the Certificates for payment;
(ii) Upon surrender of the Certificates for cancellation to the Shurgard
REIT, together with letters of transmittal duly executed and any other required
documents, holders of such Certificates will receive in consideration therefor
(a) a certificate representing that number of whole shares of Shurgard Class A
Common Stock to which such holder is entitled as Share Consideration; (b) the
right to receive Contingent Shares; and (c) cash in lieu of a fractional share
of Shurgard Class A Common Stock; and
(iii) After the Effective Time, each outstanding unsurrendered Certificate
will be deemed to represent only the right to receive upon such surrender (or
thereafter in the case of Contingent Shares) the number of shares of Shurgard
Class A Common Stock and the cash in lieu of a fractional share into which such
shares of Management Company Common Stock will have been converted; however, the
holders of outstanding unsurrendered Certificates after the Effective Time will
not be entitled to receive any dividends or distributions with a record date
after the Effective Time theretofore paid with respect to the shares of Shurgard
Class A Common Stock until such Certificates are surrendered, although any such
dividends or distributions will accrue and be payable to the holder, without
interest, upon surrender of such Certificates.
EFFECT ON MANAGEMENT COMPANY STOCK OPTION, EMPLOYEE BENEFIT AND STOCK PLANS
Under the Management Company Stock Option Plan, holders of outstanding
options to purchase shares of Management Company Common Stock will have the
right to exercise such options immediately prior to the Closing, whether or not
the vesting requirements for such options have been satisfied. Accordingly,
shares acquired on exercise of such options will be included in the shares of
Management Company Common Stock outstanding as of the Effective Time. All
outstanding options to purchase shares of Management Company Common Stock that
are not exercised prior to Closing will terminate.
At the Effective Time, and as a result of the Merger, the Shurgard REIT will
become the successor employer to the Management Company's employee stock
ownership ("ESOP") and incentive savings (401(k)) plans.
TRADING OF SHARES OF SHURGARD CLASS A COMMON STOCK
The shares of Shurgard Class A Common Stock to be issued in the Merger have
been approved for trading on the Nasdaq National Market, subject to official
notice of issuance.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties thereto. The Merger Agreement includes representations
and warranties of the Management Company as to, among other things: (i) the
corporate organization, standing and power of the Management Company; (ii)
approval by the Management Company's Board of Directors of the Merger Agreement;
(iii) the Management Company's capitalization; (iv) pending or threatened
litigation; (v) the Merger Agreement's noncontravention of any agreement, law or
charter or bylaw provision and the absence of the need (except as specified) for
governmental or third-party consents to the Merger; (vi) the terms,
75
<PAGE>
existence, operations, liabilities and compliance with applicable laws of the
Management Company's employee plans, and certain other matters relating to the
Employee Retirement Income Security Act of 1974, as amended; (vii) payment of
taxes; (viii) ownership of and rights to use certain intellectual property; (ix)
the Management Company's consolidated financial statements; (x) the conduct of
the Management Company's business in the ordinary and usual course and the
absence of any material adverse change in the Management Company's financial
condition, business, results of operations, properties, assets, liabilities or
prospects; (xi) certain contracts and leases of the Management Company; (xii)
certain matters with respect to compliance with environmental laws and
regulations; (xiii) certain transactions with affiliates; and (xiv) certain
information to be supplied by the Management Company for inclusion in this Proxy
Statement/Prospectus and in the Registration Statement.
The Merger Agreement also includes representations and warranties of the
Shurgard REIT as to, among other things: (i) the corporate organization,
standing and power of the Shurgard REIT and its subsidiaries; (ii) approvals by
the Shurgard REIT Board and the authorization of the Merger Agreement; (iii) the
Shurgard REIT's capitalization; (iv) the authorization of the Shurgard Class A
Common Stock to be issued pursuant to the Merger Agreement; (v) pending or
threatened litigation; (vi) the Merger Agreement's noncontravention of any
agreement, law or charter or bylaw provision and the absence of the need (except
as specified) for governmental or third-party consents to the Merger; (vii) the
accuracy of the Shurgard REIT's consolidated financial statements and filings
with the Commission; and (viii) the accuracy of information to be supplied by
the Shurgard REIT for inclusion in this Proxy Statement/Prospectus and in the
Registration Statement.
BUSINESS OF THE MANAGEMENT COMPANY PENDING THE MERGER
The Management Company has agreed that, except as contemplated by the Merger
Agreement, during the period from the date of the Merger Agreement to the
Effective Time, the Management Company will pursue its business in the ordinary
course, with no less diligence and effort than would be applied in the absence
of the Merger Agreement. The Management Company has also agreed, on terms
expressly set forth in the Merger Agreement, that it will seek to preserve
intact its current business organization, maintain certain levels of working
capital, keep available the services of its current officers and employees and
preserve its relationships with customers, suppliers and others having business
dealings with it with the objective that their good will and ongoing businesses
shall be unimpaired at the Effective Time. The Management Company has also
agreed that before the Effective Time, unless the Shurgard REIT agrees in
writing or as otherwise permitted by the Merger Agreement, it will not, among
other things, enter into transactions or take actions that would, among other
things, change its capitalization, make distributions to its shareholders,
change existing employee benefits or agreements, effect any business combination
or corporate reorganization or restructuring, amend its Articles of
Incorporation or establish or amend a material agreement.
NO SOLICITATION
The Shurgard REIT and the Management Company have each agreed that before
the Effective Time (i) neither of them will, and each of them will direct and
use its best efforts to cause its respective officers, directors, employees,
agents and representatives (including, without limitation, any investment
banker, attorney or accountant retained by it) not to, initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its shareholders) with respect to a merger, acquisition, tender offer,
exchange offer, consolidation or similar transaction involving, or any purchase
of all or any significant portion of the assets or any equity securities of,
such party, or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to such proposal or offer, or otherwise facilitate any effort or
attempt to make or implement such proposal; (ii) it will immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any parties conducted prior to December 19, 1994 with respect to any of the
foregoing and each will take the necessary steps to inform the individuals or
entities referred to above of the obligations undertaken pursuant to the Merger
Agreement; and (iii) it will notify the other party immediately if any such
inquiries or proposals are received by, any such information is requested
76
<PAGE>
from, or any such negotiations or discussions are sought to be initiated or
continued with, it. Notwithstanding the foregoing, nothing in the Merger
Agreement will prohibit either the Shurgard REIT Board or the Management
Company's Board from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
proposal if, and only to the extent that, the Board of Directors of such party
determines in good faith that such action is required for the Board to comply
with its fiduciary duties to its shareholders that are imposed by law and such
party keeps the other party informed of the status of any such discussions.
INTERMATION SPIN-OFF
Prior to the Closing, the Management Company will distribute all the shares
of capital stock of InterMation held by the Management Company to its
shareholders. See "FEDERAL INCOME TAX CONSEQUENCES -- Tax Treatment of the
InterMation Spin-off."
SHURGARD REALTY ADVISORS
The Management Company has agreed to sell SRA to Shurgard General Partner,
Inc., a corporation owned by Mr. Barbo, prior to the Closing, for $25,000, which
price is equal to the net capital currently required to be maintained in SRA.
The consideration will be delivered in the form of a note, to be payable upon
liquidation of SRA, or the date SRA allows its NASD broker-dealer license to
lapse, as described below, whichever occurs sooner. SRA has entered into an
agreement with the Shurgard REIT providing that so long as (i) SRA is maintained
as a legal entity licensed as a broker dealer and (ii) the Shurgard REIT
reimburses SRA for the cost of maintaining its licenses as a broker-dealer, SRA
will provide the Shurgard REIT broker-dealer services on financial terms
substantially similar to those provided to the Shurgard REIT in connection with
the Consolidation; provided, however, that SRA has the right, upon 30 days'
notice to the Shurgard REIT, to allow SRA's broker-dealer licenses to lapse
and/or to dissolve SRA.
CONDITIONS TO CONSUMMATION OF THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective
obligations of the Shurgard REIT and the Management Company to effect the Merger
are subject to certain conditions, including the following: (i) the Merger will
have been duly approved by the holders of a majority of the outstanding shares
of Shurgard Class A Common Stock and the Management Company shareholders; (ii)
the waiting period under the HSR Act applicable to the Merger will have expired
or been terminated; (iii) the Registration Statement will have been declared
effective and will not be the subject of any stop order suspending the
effectiveness thereof or any proceeding seeking such a stop order; and (iv)
subject to certain exceptions, there will not be in effect any judgment, writ,
order, injunction or decree of any court or governmental body enjoining or
otherwise preventing consummation of the transactions contemplated by the Merger
Agreement nor will there be pending or threatened by any governmental body or
other person any suit, action or proceeding seeking to restrain or restrict the
consummation of the Merger or seeking damages in connection therewith.
In addition, the respective obligations of the parties to effect the Merger
are subject to the satisfaction or mutual waiver of certain conditions,
including the following: (i) all required authorizations or other third-party
consents in connection with the execution and delivery of the Merger Agreement
and the performance of the obligations thereunder will have been obtained; (ii)
the shares of Shurgard Class A Common Stock issuable pursuant to the Merger
Agreement will have been approved for trading on the Nasdaq National Market or
any national exchange upon which the Shurgard Class A Common Stock is then
listed; (iii) Mr. Barbo shall have entered into a noncompetition agreement, and
certain existing agreements shall have been terminated; and (iv) certain major
shareholders of the Management Company shall have entered into agreements
limiting sales of Shurgard Class A Common Stock received in the Merger.
Evergreen Holding Company ("EHC"), the limited partner of Shurgard Evergreen
Limited Partnership (the "Evergreen Partnership"), has notified the Management
Company that EHC considers the proposed Merger to be a transfer of interest in
the Evergreen Partnership requiring the
77
<PAGE>
consent of EHC. EHC has requested that certain modifications to the Evergreen
Partnership limited partnership agreement be made as a condition of its consent
to the Merger. While the Management Company does not believe the Merger requires
the consent of EHC, the parties have commenced discussions and the Shurgard REIT
and the Management Company expect that the issue will be resolved prior to the
consummation of the Merger. There can be no assurance, however, that this issue
will be resolved prior to the consummation of the Merger.
CONDITIONS TO THE OBLIGATION OF THE SHURGARD REIT. In addition to the
foregoing conditions, the obligation of the Shurgard REIT to effect the Merger
is further subject to satisfaction or waiver of the following conditions, among
others: (i) the representations and warranties of the Management Company
contained in the Merger Agreement will be true and correct in all material
respects; (ii) the Management Company will have performed all agreements
required to be performed by it under the Merger Agreement; (iii) the Shurgard
REIT will have received a tax opinion of Perkins Coie that the Merger will
constitute a reorganization under Section 368(a) of the Code, with the Shurgard
REIT and the Management Company being parties to that reorganization within the
meaning of Section 368(b) of the Code such that the Management Company does not
recognize taxable gain or loss on the transaction; (iv) the InterMation Spin-off
will have occurred by virtue of a transaction that is intended to qualify for
tax-free treatment under Section 355 of the Code; (v) the Shurgard REIT shall
have received an "agreed-upon procedures" report from Deloitte & Touche LLP,
independent public accountants, with respect to the Management Company's
consolidated financial statements included in this Proxy Statement/Prospectus;
(vi) the Shurgard REIT shall have received the Management Company's Closing
Statement, which conforms to the requirements of the Merger Agreement; (vii)
from December 19, 1994 through the Effective Time, there shall not have occurred
any change in the financial condition, business or operations of the Management
Company and its subsidiaries, taken as a whole, that would have or would be
reasonably likely to have a material adverse effect on the Management Company's
financial condition, business or operations; (viii) holders in excess of 10% of
the shares of Management Company Common Stock shall not have exercised
dissenters' rights under applicable law; (ix) the InterMation Spin-off shall
have occurred; (x) the disposition of SRA described in the Merger Agreement
shall have occurred; (xi) all consents necessary to transfer certain
intellectual property rights to the Surviving Corporation shall have been
obtained; and (xii) the Closing Statement shall reflect an aggregate of cash and
cash equivalents, short-term investments, fees, accounts receivable and
reimbursements receivable of not less than $1,060,700.
CONDITIONS TO THE OBLIGATION OF THE MANAGEMENT COMPANY. In addition to the
foregoing conditions, the obligation of the Management Company to effect the
Merger is further subject to satisfaction or waiver of the following conditions,
among others: (i) the representations and warranties of the Shurgard REIT
contained in the Merger Agreement are true and correct in all material respects;
(ii) the Shurgard REIT has performed all agreements required to be performed by
it under the Merger Agreement; (iii) from December 19, 1994 through the
Effective Time, there has not occurred any change in the financial condition,
business or operations of the Shurgard REIT and its subsidiaries, taken as a
whole, that would have or would be reasonably likely to have a material adverse
effect on the Shurgard REIT's business, properties, operations, condition
(financial or other) or prospects; and (iv) the Management Company has received
a tax opinion of Riddell, Williams, Bullitt & Walkinshaw that the InterMation
Spin-off more likely than not qualifies for tax-free treatment under Section 355
of the Code.
AMENDMENT AND WAIVER; TERMINATION
The parties to the Merger Agreement may not amend, change, supplement, waive
or otherwise modify the Merger Agreement, except by an instrument in writing
signed by the party against whom enforcement is sought.
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the Management Company shareholders or
the Shurgard REIT shareholders, either by the mutual written consent of the
Shurgard REIT and the Management Company or by
78
<PAGE>
the mutual action of their respective Board of Directors. The Merger Agreement
may also be terminated by action of either the Shurgard REIT Board or the
Management Company's Board of Directors if (i) the Merger has not been
consummated by May 25, 1995 (provided that the terminating party shall not have
breached in any material respect its obligations under the Merger Agreement in
any manner that shall have proximately contributed to the occurrence of the
failure of the Merger to occur on or before such date); (ii) either the holders
of the Management Company Common Stock or the holders of the Shurgard Class A
Common Stock shall fail to approve the Merger; or (iii) any court or
governmental body in the United States has issued a final and nonappealable
order, decree or ruling or taken any other final and nonappealable action
permanently restraining, enjoining or otherwise prohibiting the Merger (provided
that the party seeking such termination has used all reasonable efforts to
remove such order, decree, ruling or injunction).
REGULATORY MATTERS
The Merger is subject to the expiration or termination of the applicable
waiting period under the HSR Act. Certain aspects of the Merger will require
notifications to, and filings with, certain securities and other authorities in
certain states, including jurisdictions where the Shurgard REIT and the
Management Company currently operate.
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and the
applicable waiting period has expired or been terminated. The Shurgard REIT and
the Management Company filed notification and report forms under the HSR Act
with the FTC and the Antitrust Division on January 26, 1995. Unless it is
extended, the waiting period for these filings will terminate on February 25,
1995. At any time before or after consummation of the Merger, the Antitrust
Division or the FTC could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin the
consummation of the Merger or seeking divestiture of substantial assets of the
Shurgard REIT or the Management Company. At any time before or after the
Effective Time, and notwithstanding that the waiting period under the HSR Act
has expired, any state could take such action under the antitrust laws as it
deems necessary or desirable in the public interest. Such action could include
seeking to enjoin the consummation of the Merger or seeking divestiture of
substantial assets of the Shurgard REIT or the Management Company. Private
parties may also seek to take legal action under the antitrust laws under
certain circumstances.
Based on information available to them, the Shurgard REIT and the Management
Company believe that the Merger can be effected in compliance with federal and
state antitrust laws. However, there can be no assurance that a challenge to
consummation of the Merger on antitrust grounds will not be made or that, if
such a challenge were made, the Shurgard REIT and the Management Company would
prevail or would not be required to accept certain adverse conditions in order
to consummate the Merger.
INDEMNIFICATION OF MANAGEMENT COMPANY DIRECTORS AND OFFICERS
Under the Merger Agreement, the Shurgard REIT has agreed to keep in effect
provisions in its Certificate of Incorporation and By-Laws providing for
limitation of director liability and indemnification of directors, officers,
employees and agents at least to the extent such persons are entitled thereto
under the Articles of Incorporation and By-Laws of the Management Company as of
December 19, 1994, subject to Delaware law. To the extent the Shurgard REIT
Certificate of Incorporation and By-Laws do not provide for indemnification of
directors or officers of predecessor corporations the Shurgard REIT will,
subject to Delaware law, contractually assume the indemnification obligations
under the Management Company's By-Laws. In addition, such provisions will not be
amended, repealed or otherwise modified in any manner that would adversely
affect the rights of individuals who at any time prior to the Effective Time
were directors, officers, employees or agents of the
79
<PAGE>
Management Company in respect of actions or omissions occurring at or prior to
the Effective Time (including, without limitation, the transactions contemplated
by the Merger Agreement), unless such modification is required by law.
RESALE OF SHARES OF SHURGARD CLASS A COMMON STOCK ISSUED IN THE MERGER;
AFFILIATES
The Merger Agreement provides that Messrs. Barbo, Buerk, Daniels, Grant,
Knutzen (as trustee of the Barbo family trust) and Rowe will agree not to sell,
pledge (on a nonrecourse basis), transfer or otherwise dispose of (except by
operation of law) more than 40% of the Share Consideration and the Contingent
Shares received by them for a two-year period commencing on the Closing Date.
Except as provided above, the shares of Shurgard Class A Common Stock to be
issued in the Merger will be freely transferable, except that shares issued to
any Management Company shareholder who may be deemed to be an "affiliate" (as
defined under the Securities Act, and generally including, without limitation,
directors, certain executive officers and beneficial owners of 10% or more of a
class of capital stock) of the Management Company for purposes of Rule 145 under
the Securities Act shall not be transferable except in compliance with the
Securities Act. Approximately 78% of the shares of Shurgard Class A Common Stock
to be issued pursuant to the Merger will be held by such "affiliates." The
Management Company shareholders will not have registration rights with respect
to the shares of Shurgard Class A Common Stock they receive in the Merger.
Such "affiliates" have delivered a letter to the Shurgard REIT indicating
that they will not sell, pledge, transfer or otherwise dispose of any shares of
the Shurgard Class A Common Stock issued pursuant to the Merger except (i) in
accordance with an effective registration statement, (ii) in compliance with the
Rule 145 under the Securities Act, or (iii) pursuant to a transaction exempt
from, or otherwise not subject to, the registration requirements of the
Securities Act.
This Proxy Statement/Prospectus does not cover resales of shares of Shurgard
Class A Common Stock received by any person who may be deemed to be an affiliate
of the Management Company.
AGREEMENT OF MANAGEMENT COMPANY SIGNIFICANT SHAREHOLDERS TO VOTE IN FAVOR OF THE
MERGER
Certain significant shareholders of the Management Company (the "Management
Company Significant Shareholders") have entered into a Shareholders Agreement
pursuant to which each of the Management Company Significant Shareholders has
agreed to attend (in person or by proxy) the special meeting of Management
Company shareholders at which the Merger Agreement will be presented for
approval and to vote all shares of Management Company Common Stock that such
shareholder has the right to vote in favor of the Merger Agreement. Such special
meeting of Management Company shareholders is currently scheduled for March 21,
1995. As of December 31, 1994, the Management Company Significant Shareholders
had the power to vote shares representing an aggregate of approximately 85% of
the outstanding shares of Management Company Common Stock. Accordingly, approval
of the Merger Agreement by the Management Company shareholders is assured.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method under generally
accepted accounting principles for accounting and financial reporting purposes.
EXPENSES AND FEES
Each party will bear its own expenses, including the fees and expenses of
any attorneys, accountants, investment bankers, brokers, finders or other
intermediaries, incurred in connection with the Merger Agreement and the
transactions contemplated thereby. Notwithstanding the foregoing, the Merger
Agreement provides that if an officer, director or affiliate of the Management
Company (collectively, the "Litigation Parties") is involuntarily made a party
to a lawsuit in connection with the Merger, the Shurgard REIT will defend,
indemnify and pay the costs associated with the defense of such Litigation
Parties. In addition, if it is deemed appropriate, such Litigation Parties may
retain separate legal counsel to defend actions brought in connection with the
Merger and the Shurgard
80
<PAGE>
REIT will likewise pay the associated costs. Further, the Management Company and
the Shurgard REIT have each agreed in the Merger Agreement not to enter into
settlement proceedings without the consent of the other. The Shurgard REIT will
have no duty to indemnify any of the Litigation Parties for any liability
imposed under a final judgment to the extent such judgment has been finally
adjudicated and determined to have been the result of an untrue statement or an
omission of a material fact made by the Management Company in certain sections
of the Registration Statement or this Proxy Statement/Prospectus, or as a result
of fraud, intentional misconduct or knowing violation of the law by such
Litigation Parties.
RIGHTS OF DISSENTING MANAGEMENT COMPANY SHAREHOLDERS
Holders of Shurgard Class A Common Stock will not be entitled to dissenters'
rights as a result of the Merger.
A record or beneficial holder of Management Company Common Stock will have
the right to dissent with respect to the Merger and, subject to certain
conditions, will be entitled to receive a cash payment equal to the fair value
of his or her shares under the WBCA. Any Management Company shareholder who
intends to exercise his or her dissenters' rights must not vote his or her
shares in favor of the Merger and must satisfy the procedural requirements
concerning dissenters' rights specified in the WBCA. The Management Company will
be required to pay to each Management Company dissenting shareholder who
complies with the procedures of the WBCA, within 30 days after the later of the
Effective Time and the date the payment demand is received, the amount that the
Management Company estimates to be the fair value of the shareholders shares,
plus accrued interest. The Management Company will provide, along with such
payment, certain financial information, and an explanation of how the Management
Company estimated the fair value of the shares. Any dissenting shareholder who
is dissatisfied with such payment may, within 30 days of such payment, notify
the Management Company in writing of such shareholder's estimate of fair value
of his or her shares and the amount of interest due, and demand payment thereof.
If any Management Company dissenting shareholder's demand for payment is not
settled within 60 days after receipt by the Management Company of such
shareholder's payment demand, the WBCA requires that the Management Company
commence a proceeding in King County Superior Court, and petition the court to
determine the fair value of the shares and accrued interest. Such a
determination of fair value could result in a price higher than, lower than or
equal to the price available to Management Company shareholders pursuant to the
Merger. Under the WBCA, a court may consider a variety of factors in determining
fair value. The WBCA requires that the court consider all relevant facts and
circumstances in determining the fair value and that it not give undue emphasis
to any one factor.
81
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion summarizes those federal income tax considerations
resulting from the Merger that materially affect the Shurgard REIT, the
Management Company and their respective shareholders. The discussion is general
in nature and is not intended as a substitute for professional tax advice.
Accordingly, the discussion does not purport to be a complete analysis or
listing of all potential effects relevant to a decision whether to vote in favor
of the Merger. The discussion neither addresses the tax consequences that may be
relevant to a particular Shurgard REIT or a Management Company shareholder nor a
Shurgard REIT or a Management Company shareholder that is subject to special
treatment under certain federal income tax laws, such as dealers in securities,
banks, insurance companies, tax-exempt organizations and non-United States
persons, nor does it address any consequences arising under the laws of any
state, local or foreign jurisdiction. The discussion is based upon the Code,
Treasury regulations promulgated thereunder and administrative rulings and court
decisions as of the date hereof. The foregoing is subject to change either
prospectively or retroactively and any such change could affect the continuing
validity of the discussion. THE SHURGARD REIT AND MANAGEMENT COMPANY
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO THEM.
TAX TREATMENT OF THE MERGER
The following is a summary of the material federal income tax consequences
of the Merger. No ruling from the IRS will be applied for with respect to the
federal income tax consequences of the Merger. Thus, there can be no assurance
that the IRS will agree with the conclusions set forth in this Proxy
Statement/Prospectus.
In connection with the Merger, Perkins Coie, counsel to the Shurgard REIT,
has delivered an opinion to the Shurgard REIT and the Management Company that
for federal income tax purposes under current law, assuming that the Merger and
related transactions will take place as described in the Merger Agreement and
that certain factual matters represented by the Shurgard REIT, the Management
Company and the Management Company Significant Shareholders are true and correct
at the Effective Time, the following will be the material federal income tax
consequences to the Management Company and the Shurgard REIT as a result of the
Merger:
(i) the Merger will be treated as a reorganization under Section 368(a)
of the Code;
(ii) each of the Shurgard REIT and the Management Company will be a
party to the reorganization under Section 368(b) of the Code;
(iii) no gain or loss will be recognized by the Shurgard REIT or the
Management Company in the Merger;
(iv) immediately following the Effective Time, the assets of the
Management Company in the hands of the Shurgard REIT will have the same
adjusted tax basis as they had in the hands of the Management Company
immediately prior to the Effective Time; and
(v) the holding period for each of the assets of the Management Company
in the hands of the Shurgard REIT following the Effective Time will include
the period each asset was held by the Management Company immediately prior
to the Effective Time.
In addition, Perkins Coie has opined, based on these assumptions and
representations, that the following should be the material tax consequences to
the Management Company shareholders as a result of the Merger:
(x) no gain or loss should be recognized by Management Company
shareholders upon receipt of shares of Shurgard Class A Common Stock in
exchange for their shares of Management Company Common Stock (other than
Contingent Shares recharacterized as interest as discussed
82
<PAGE>
in "-- Contingent Shares and Indemnification Shares"), except that
Management Company shareholders who receive cash in lieu of a fractional
share of Shurgard Class A Common Stock will recognize gain equal to the
difference between such cash and the tax basis allocated to their fractional
shares of Shurgard Class A Common Stock, and such gain will constitute
capital gain if their shares of Management Company Common Stock were held as
a capital asset at the Effective Time;
(y) the tax basis of the shares of Shurgard Class A Common Stock
received (including fractional shares of Shurgard Class A Common Stock
deemed received) in the Merger by Management Company shareholders (other
than Contingent Shares recharacterized as interest as discussed in "--
Contingent Shares and Indemnification Shares") should be the same as the tax
basis of their shares of Management Company Common Stock exchanged therefor
and, until the final payment of Contingent Shares, such basis shall be
determined as though the maximum number of Contingent Shares had been issued
under the Merger Agreement (see "-- Contingent Shares and Indemnification
Shares") and all of the Indemnification Shares are released at the end of
the escrow period (see "-- Indemnification Shares and Adjustment
Indemnification Shares"); and
(z) the holding period of the shares of Shurgard Class A Common Stock in
the hands of the Management Company shareholders (other than Contingent
Shares recharacterized as interest as discussed in "-- Contingent Shares and
Indemnification Shares") should include the holding period of their shares
of Management Company Common Stock exchanged therefor, provided such shares
of Management Company Common Stock are held as a capital asset at the
Effective Time.
Perkins Coie will opine as to each of the foregoing items regarding the
federal income tax consequences of the Merger. Perkins Coie's opinion will be
limited, however, to the foregoing consequences. Perkins Coie is not opining as
to the consequences of other elements of the transaction, including, without
limitation, the consequences of the InterMation Spin-off. For a discussion of
this item see "-- Tax Treatment of the InterMation Spin-off."
CONTINGENT SHARES AND INDEMNIFICATION SHARES
ISSUANCE OF CONTINGENT SHARES. The Shurgard REIT will recognize no gain or
loss upon the issuance of Contingent Shares. It is likely that the Shurgard REIT
would recognize no gain or loss upon the receipt of Indemnification Shares from
the escrow fund, although the IRS might take the position that such return
constituted ordinary income to the Shurgard REIT if the related indemnification
claim was for lost profits of the Shurgard REIT. If the Shurgard REIT were to
recognize ordinary income on receipt of such shares, the Shurgard REIT may be
required to increase its distributions to retain REIT status and the Shurgard
REIT shareholders would recognize dividend income on receipt of any such
additional distribution.
RECEIPT OF CONTINGENT SHARES. The Shurgard REIT may issue Contingent Shares
during each fiscal quarter ending after the Effective Time, through the fifth
anniversary of the Closing. See "THE MERGER -- Contingent Shares." Generally,
the offering and issuance of Contingent Shares should not adversely affect the
tax-free nature of the Merger. Nonetheless, a portion of the Contingent Shares
issued to Management Company shareholders will be taxable upon receipt by the
Management Company shareholders as interest income. The amount of interest
income recognized will equal the excess of (i) the fair market value of the
Contingent Shares at the time they are issued over (ii) such fair market value
discounted back to the Effective Time using an applicable federal interest rate.
Because of the factual uncertainty regarding the amount and timing of the
issuance of the Contingent Shares, the amount of the interest income to be
recognized by the Management Company shareholders is uncertain.
INDEMNIFICATION SHARES AND ADJUSTMENT INDEMNIFICATION SHARES. Subject to
certain limitations, a total of 15% of the Share Consideration will be deposited
into an escrow account at the Closing to
83
<PAGE>
allow the Shurgard REIT to recover from the Indemnification Shares and
Adjustment Indemnification Shares costs or expenses arising from certain events.
See "THE MERGER -- Indemnification Shares." Each Management Company shareholder
will be deemed to own at the Effective Time that portion of the Indemnification
Shares and Adjustment Indemnification Shares that he or she would receive upon
the release of such shares if no payment of such shares is made during the
escrow period. The issuance of the Indemnification Shares and Adjustment
Indemnification Shares should not adversely affect the tax-free nature of the
reorganization nor adversely impact a Management Company shareholder. The IRS
has ruled that the payment of shares as indemnification from an escrow fund of
the type used in the Merger Agreement will not result in gain or loss to the
beneficial owner of the shares if the payment is calculated on the basis of the
fair market value of the shares at the time of the initial reorganization. Rev.
Rul. 76-42, 1976-1 C.B. 102. Accordingly, the Management Company shareholders
should recognize no gain or loss upon a transfer of Indemnification Shares or
Adjustment Indemnification Shares to the Shurgard REIT. Additionally, the basis
of such shares will be added to the basis of the Indemnification Shares and
Adjustment Indemnification Shares remaining in the escrow fund.
EXERCISE OF DISSENTERS' RIGHTS
Management Company shareholders who exercise dissenters' rights will
recognize gain or loss equal to the difference between such cash and the tax
basis in their shares of Management Company Common Stock subject to dissenters'
rights, and such gain or loss will constitute capital gain or loss if their
shares of Management Company Common Stock are held as a capital asset at the
Effective Time. However, such exercise may be subject to the provisions and
limitations of Section 302 of the Code. Accordingly, under certain limited
circumstances, a Management Company shareholder exercising dissenters' rights
may recognize ordinary income to the extent of the cash received if the
resulting redemption were not treated as a complete termination of the interest
of the Management Company shareholder in the Shurgard REIT, after application of
certain attribution rules under Section 302 of the Code. For example, if persons
related (within the meaning of Section 318 of the Code) to a Management Company
shareholder who exercises dissenters' rights own shares of the Shurgard REIT
after the Merger, or the Management Company shareholder exercises dissenters'
rights for some, but not all, of his or her shares, the cash received upon the
exercise of dissenters' rights may result in dividend treatment. Management
Company shareholders should consult their own tax advisers to determine whether
dividend treatment could apply to their particular circumstances.
BUILT-IN GAIN RULES
Under the "Built-in Gain Rules" of Notice 88-19, 1988-1 C.B. 486, the
Shurgard REIT will be subject to a corporate tax if it disposes of any of the
assets acquired from the Management Company in the Merger during the 10-year
period beginning at the Effective Time (the "Restriction Period"). This tax is
imposed at the top regular corporate rate (currently 35%) on the excess of (i)
the lesser of (a) the fair market value at the Effective Time of the assets
disposed of and (b) the selling price of such assets over (ii) the Shurgard
REIT's adjusted basis at the Effective Time in such assets (such excess being
referred to as the "Built-in Gain"). The Shurgard REIT does not intend to
dispose of any of the assets acquired in the Merger during the Restriction
Period. However, the Merger Agreement does contemplate (x) the Shurgard REIT's
disposition of interests in certain Partnerships (the "Partnership Interests")
acquired from the Management Company in the Merger and (y) the sale of some or
all of the assets of these Partnerships, as described in "THE MERGER --
Contingent Shares." On such a disposition, if the fair market value of a
Partnership Interest at the Effective Time exceeded the Shurgard REIT's basis
therein or if the fair market value of the Partnership assets at the Effective
Time exceeded the Partnership's basis therein, the Shurgard REIT would be taxed
at the time of the disposition on the resulting gain at the top corporate rate
under the Built-in Gain Rules. SEE, E.G., Prop. Treas. Reg. 1.1374-4(h).
The results described above with respect to the recognition of Built-in Gain
assume that the Shurgard REIT will make a certain election pursuant to the
Built-in Gain Rules or applicable future administrative rules or Treasury
Regulations. The Shurgard REIT intends to make this election. If
84
<PAGE>
the Shurgard REIT does not make this election, the Management Company will be
taxed on the Built-in Gain at the Effective Time at regular corporate tax rates.
Furthermore, if the Shurgard REIT does not make the election, the InterMation
Spin-off may fail to qualify under Section 355 of the Code. See "-- Tax
Treatment of the InterMation Spin-off" and "-- Failure of the InterMation
Spin-off to Qualify."
FAILURE OF THE MERGER TO QUALIFY
CONSEQUENCES TO THE MANAGEMENT COMPANY AND MANAGEMENT COMPANY
SHAREHOLDERS. The tax opinion regarding the consequences of the Merger is based
upon a number of assumptions and representations, including, among others, that
(i) the fair market value of the Shurgard Class A Common Stock and other
consideration received by each Management Company shareholder will be
approximately equal to the fair market value of the Management Company Common
Stock surrendered in the exchange and (ii) none of the Shurgard Class A Common
Stock received by any shareholder employee of the Management Company is separate
compensation for services rendered to the Shurgard REIT. Should any of these
assumptions or representations upon which the tax opinions regarding the Merger
are based prove inaccurate, the Merger may not qualify as a tax-free
reorganization under Section 368(a) of the Code. Furthermore, such tax opinions
are not binding upon the IRS, which may challenge the qualification of the
Merger as a reorganization under Section 368(a) of the Code. If the Merger does
not so qualify, (i) the Management Company shareholders will recognize gain or
loss upon the Merger in an amount equal to the difference between the fair
market value at the Effective Time of the Shurgard Class A Common Stock
received, including Contingent Shares when and as received, and their adjusted
tax basis in the shares of Management Company Common Stock exchanged therefor,
including Contingent Shares when and as received and (ii) the Management Company
will recognize gain or loss in an amount equal to the difference between the
fair market value of the Shurgard Class A Common Stock issued in the Merger,
including Contingent Shares when and as received, and the adjusted tax basis of
the assets that it transfers to the Shurgard REIT in the Merger.
Furthermore, the failure of the Merger to qualify under Section 368(a) of
the Code may cause the InterMation Spin-off to fail to qualify under Section 355
of the Code. For a discussion of the InterMation Spin-off, including the adverse
tax consequences to the Management Company and the Management Company
shareholders that may result from the InterMation Spin-off's failure to qualify
under Section 355 of the Code, see "-- Tax Treatment of the InterMation
Spin-off."
CONSEQUENCES TO THE SHURGARD REIT. The Shurgard REIT will not directly
recognize gain or loss as a result of the failure of the Merger to qualify as a
reorganization under Section 368(a) of the Code. Nonetheless, the Shurgard REIT
will be primarily liable as the successor to the Management Company for the
resulting tax liability imposed upon the Management Company. Furthermore, the
failure of the Merger to qualify under Section 368(a) of the Code may cause the
InterMation Spin-off to fail to qualify under Section 355 of the Code. For a
discussion of the InterMation Spin-off, including the adverse tax consequences
to the Shurgard REIT that may result from the InterMation Spin-off's failure to
qualify under Section 355 of the Code, see "-- Tax Treatment of the InterMation
Spin-off."
TAX TREATMENT OF THE INTERMATION SPIN-OFF
The following is a summary of the material federal income tax consequences
of the InterMation Spin-off. Based on its guidelines for submitting a ruling,
the IRS has informed the Management Company that it will not consider a ruling
regarding these consequences. Accordingly, there can be no assurance that the
IRS will determine that the InterMation Spin-off qualifies under Section 355 of
the Code.
In connection with the InterMation Spin-off, Riddell, Williams, Bullitt &
Walkinshaw, counsel to the Management Company, will deliver an opinion to the
Management Company that for federal income tax purposes under current law,
assuming that the InterMation Spin-off and related transactions will take place
as described in an Agreement and Plan of Corporate Separation between the
85
<PAGE>
Management Company and InterMation and that certain factual matters represented
by the Management Company, InterMation and certain Management Company
shareholders are true and correct at the time of the InterMation Spin-off, the
following would more likely than not be the material federal income tax
consequences of the InterMation Spin-off:
(i) the distribution of the shares of InterMation common stock in the
InterMation Spin-off will be treated as described in Section 355(a)(1) of
the Code;
(ii) no gain or loss will be recognized by (and no amount will be
included in the income of) the Management Company shareholders upon the
receipt of the shares of InterMation common stock distributed to them by the
Management Company;
(iii) no gain or loss will be recognized by the Management Company upon
the distribution of all the shares of InterMation common stock held by it to
its shareholders;
(iv) the basis of the shares of Management Company Common Stock and the
shares of InterMation common stock held by the Management Company
shareholders after the distribution will be the same as the basis of the
shares of Management Company Common Stock held immediately prior to the
distribution, allocated in proportion to the relative fair market values of
the shares of Management Company Common Stock and the shares of InterMation
common stock on the date of the distribution;
(v) provided that the shares of Management Company Common Stock were
held as a capital asset on the date of the distribution, the holding period
of the shares of InterMation common stock received by the Management Company
shareholders will include the holding period of the shares of Management
Company Common Stock exchanged therefor; and
(vi) the earnings and profits of the Management Company immediately
before the distribution will be allocated between the Management Company and
InterMation in proportion to the relative fair market values of the two
corporations as of the date of distribution, with the amount of earning and
profits allocated to InterMation being limited to the net worth of
InterMation as of the date of the distribution.
The opinion of Riddell, Williams, Bullitt & Walkinshaw, counsel to the
Management Company, regarding the InterMation Spin-off will be limited to the
foregoing.
FAILURE OF THE INTERMATION SPIN-OFF TO QUALIFY
CONSEQUENCES TO THE MANAGEMENT COMPANY AND MANAGEMENT COMPANY
SHAREHOLDERS. The tax opinion regarding the InterMation Spin-off is based on a
number of assumptions and representations, including, among others, that (i) the
assumption that the Merger will take place and that it will qualify as a
tax-free reorganization under Section 368(a)(1) of the Code and (ii) the parties
to the Merger Agreement have entered into the Merger Agreement for valid
business reasons and not for the purpose of tax avoidance. Should any of these
assumptions prove inaccurate, the InterMation Spin-off may not qualify as a
distribution under Section 355(a)(1) of the Code. Furthermore, the tax opinion
regarding the InterMation Spin-off is not binding on the IRS, which may
challenge the qualification of the InterMation Spin-off as a distribution under
Section 355(a)(1) of the Code. If the InterMation Spin-off does not so qualify,
(i) the Management Company shareholders will recognize income as a result of the
InterMation Spin-off in an amount equal to the fair market value of the
InterMation common stock received and (ii) the Management Company will recognize
gain in an amount equal to the difference between the fair market value of the
shares of InterMation common stock it distributes in the InterMation Spin-off
and its basis in such shares.
CONSEQUENCES TO THE SHURGARD REIT AND THE SHURGARD REIT SHAREHOLDERS. The
Shurgard REIT will not directly recognize any gain or loss in the event the
InterMation Spin-off fails to qualify as a distribution under Section 355(a)(1)
of the Code. Nonetheless, the Shurgard REIT will be primarily liable as the
successor to the Management Company for the tax liability imposed upon the
86
<PAGE>
Management Company. In the event the Shurgard REIT is held primarily liable for
this resulting tax liability, the Shurgard REIT will be partially or completely
indemnified for the tax costs associated with the disqualified InterMation
Spin-off. If the resulting tax liability is determined within three years of the
Effective Time, the indemnification will be satisfied, to the extent possible,
through retention of the Indemnification Shares. If the resulting tax liability
is determined after such time, the Shurgard REIT will have recourse against the
Management Company Significant Shareholders, subject to certain limitations. See
"THE MERGER -- Indemnification Shares." Because the amount of such liability
will be based on facts that are not available at this time, including the fair
market value of the InterMation common stock on the date of distribution, it is
not possible to determine with reasonable certainty the amount of any potential
tax liability should the InterMation Spin-off fail to qualify as tax-free.
Accordingly, it is possible that the amount of any resulting tax liability,
including potential interest, penalties and professional costs, may exceed the
extent of the available indemnity.
If the InterMation Spin-off does not qualify under Section 355 of the Code,
however, the amount of accumulated earnings and profits acquired by the Shurgard
REIT from the Management Company in the Merger will be reduced. See "--
Consequences of the Merger on the Shurgard REIT's Qualification as a REIT --
Distributions of Accumulated Earnings and Profits Attributable to Non-REIT
Years." The taxable distribution of InterMation shares by the Management Company
prior to the Merger has the net effect of reducing the Management Company's
accumulated earnings and profits by the adjusted tax basis of the distributed
shares. By reducing the amount of the earnings and profits, the amount of
Shurgard REIT distributions previously characterized as dividends will be
equally reduced and such distributions would be treated as a tax-free return of
capital to the Shurgard REIT shareholders to the extent of their basis in their
Shurgard Class A Common Stock, and thereafter as capital gain income.
Accordingly, if the InterMation Spin-off is subsequently determined to be
taxable, the Shurgard REIT shareholders may be entitled to a tax refund
associated with any distribution made during 1995 that was incorrectly reported
as a dividend.
CONSEQUENCES OF THE MERGER ON THE SHURGARD REIT'S QUALIFICATION AS A REIT
THE SHURGARD REIT'S SELF-ADMINISTRATION OF MANAGEMENT SERVICES. Because of
the unique federal income tax requirements attributable to REITs, a number of
federal income tax issues must be addressed in connection with the Merger that
are unique to the Shurgard REIT's status as a REIT. Of primary importance is the
issue of whether the Shurgard REIT is permitted to perform its property
management functions internally. Generally, REITs are permitted to perform
services for their own tenants, which services are usually and customarily
rendered in connection with the rental of space for occupancy only and are not
considered to be "rendered to the occupant." If a REIT performs services beyond
this extent, the income received for the use of its property will not satisfy
the REIT income tests. See "-- Tax Consequences to Management Company
Shareholders Receiving Shurgard Class A Common Stock -- Income Tests." Failure
to satisfy these tests would result in the disqualification of the Shurgard REIT
as a REIT. See "-- Tax Consequences to Management Company Shareholders Receiving
Shurgard Class A Common Stock -- Failure of the Shurgard REIT to Qualify as a
REIT."
As a result of the Merger, the Shurgard REIT will perform or
"self-administer" the property management activities for properties it owns.
Prior to the Consolidation, and on behalf of the Shurgard REIT, the Management
Company obtained an IRS private letter ruling in which the IRS ruled that,
should the Shurgard REIT acquire the Management Company and self-administer the
management activities of its properties, such property management services
rendered by the Shurgard REIT would not adversely affect the characterization of
the Shurgard REIT's rents from real property. The ruling is based on a
description of those management services to be performed by the Shurgard REIT in
connection with its own properties, including maintenance, repair, lease
administration and accounting, and security. The ruling also considers the
ancillary services to be directly performed by the
87
<PAGE>
Shurgard REIT such as truck rentals and inventory sales. Based on this ruling,
the property management services rendered by the Shurgard REIT on its own
properties should not adversely affect the characterization of the Shurgard REIT
as a REIT.
NONQUALIFYING INCOME. The Shurgard REIT must meet several annual gross
income tests to retain its REIT qualification. See "-- Tax Consequences to
Management Company Shareholders Receiving Shurgard Class A Common Stock --
Income Tests." Under the 95% gross income test, the Shurgard REIT must derive at
least 95% of its total gross income from specified classes of income related to
real property, dividends, interest or gains from the sale or other disposition
of stock or other securities that do not constitute "dealer property." Income
related to real property includes: (i) proceeds from the rental of self-storage
facilities; (ii) interest on obligations secured by mortgages on real property;
and (iii) gains from the sale or other disposition of real property (other than
real property held by the Shurgard REIT as a dealer).
In the event the Shurgard REIT fails to meet the 95% test during any taxable
year, its REIT status would terminate for that year and future years unless it
satisfies each of the following: (i) it reported the source and nature of each
item of its gross income in its federal income tax return for such year; (ii)
the inclusion of any incorrect information in its return is not due to fraud
with intent to evade tax; and (iii) the failure to meet such test is due to a
reasonable cause and not to willful neglect. Accordingly, if the failure to meet
the 95% test is based on a reasonable cause such as a miscalculation or
interpretation as to the nature of the gross income and the Shurgard REIT
reports all of its nonqualifying income on its tax return, the Shurgard REIT
would not lose its REIT status. If the Shurgard REIT has projected that it may
have excess nonqualifying income for any years and fails to cure such problem,
it may face termination of its REIT status. If so terminated, the Shurgard REIT
cannot again elect REIT status for five years unless it can prove that such
termination was due to reasonable cause, not willful neglect.
Furthermore, in the event the Shurgard REIT fails to meet the 95% test, even
if the Shurgard REIT's REIT status is not terminated, the Shurgard REIT would
still be subject to an excise tax on any excess nonqualifying income. Generally,
if the Shurgard REIT fails the 95% test but still retains its qualification as a
REIT, it would be subject to a 100% excise tax on the amount of the excess
nonqualifying income multiplied by a fraction, the numerator of which is the
Shurgard REIT's taxable income (computed without its distribution deduction) and
the denominator of which is the Shurgard REIT's gross income from all sources.
This excise tax has the general effect of causing the Shurgard REIT to pay all
net profits generated from this excess nonqualifying income to the IRS.
Presently, the Shurgard REIT obtains a small percent of its gross income
from activities that do not qualify under this 95% gross income test
("Nonqualifying Income"). For a description of these activities, see "POLICIES
REGARDING INVESTMENT AND CERTAIN OTHER ACTIVITIES -- Policy With Respect to
Dividends and Certain Other Activities -- Ancillary Services." For example,
income received by the Shurgard REIT from the sale of inventory products such as
locks, boxes and packing materials and commissions from the rental of Ryder
trucks do not qualify under the 95% test. Currently, on an annualized basis,
gross income from these nonqualifying activities accounts for approximately
2.84% of the total gross income of the Shurgard REIT.
Upon the Merger, the gross income received by the Shurgard REIT from
property management services on properties owned by third parties will be
treated as income not qualifying under the 95% test. For a discussion regarding
the third-party property management contracts of the Management Company, see
"SHURGARD INCORPORATED -- Management Services." In addition, to the extent third
parties reimburse the Management Company for legal, acquisition, accounting,
operations or other administrative services performed by Management Company
employees, the amount of such reimbursement should similarly be treated as
Nonqualifying Income. If there was no change in the Shurgard REIT's current
revenues and assuming that the Merger closed on March 31, 1995, the
88
<PAGE>
Shurgard REIT would earn Nonqualifying Income of approximately 4.9% of its total
gross income in 1995 and would earn Nonqualifying Income of approximately 5.7%
of its total gross income for subsequent years, thereby failing the 95% test.
The percentage of Nonqualifying Income may be reduced in a variety of ways.
Because the income tests are based on a percentage of total gross income,
increases in qualifying rents will reduce the percentage of Nonqualifying
Income. Pursuant to the Shurgard REIT's existing acquisition program, additional
assets may be acquired by it during 1995 that would generate additional
qualifying income, thereby lowering the percentage of total Nonqualifying Income
recognized by it. There can, of course, be no assurance that future acquisitions
will be made in amounts or at such times to satisfy these gross income
requirements. Increases in other Nonqualifying Income may similarly affect these
calculations.
Accordingly, if the Shurgard REIT determines at any time during the year
that the receipt of third-party management fees could adversely affect its
ability to satisfy the 95% test, it will notify the third-party property owners
to which it provides property management services and request that management
fees be paid at reduced rates for the remainder of the year. The Shurgard REIT
will, to the extent possible under existing tax guidelines, defer receipt of
such fees to a succeeding year in which recognition of the Nonqualifying Income
does not jeopardize its qualification as a REIT. If such deferral is not
possible, however, the Shurgard REIT would reduce the fees without condition or
deferral. Although this measure would reduce the Shurgard REIT's gross income
(and correspondingly its net profits), it would effectively reduce the Shurgard
REIT's overall Nonqualifying Income and preserve its REIT status. The Shurgard
REIT anticipates that this measure will be taken only as necessary and intends
to pursue less costly alternatives when appropriate.
DISTRIBUTIONS OF ACCUMULATED EARNINGS AND PROFITS ATTRIBUTABLE TO NON-REIT
YEARS. A REIT is not allowed to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first taxable
year in which it has non-REIT earnings and profits to distribute any such
accumulated earnings and profits. In a corporate reorganization qualifying as a
tax-free statutory merger, the acquired corporation's accumulated earnings and
profits are carried over to the surviving corporation. Any accumulated earnings
and profits treated as having been acquired by a REIT through such a merger will
be treated as accumulated earnings and profits of a REIT attributable to
non-REIT years. Accordingly, any accumulated earnings and profits of the
Management Company will carry over to the Shurgard REIT and the Shurgard REIT
will be required to distribute these accumulated earnings and profits prior to
the close of 1995 (the year in which the Merger occurs). Failure to do so would
result in disqualification of the Shurgard REIT's REIT status.
The amount of the accumulated earnings and profits of the Management Company
acquired by the Shurgard REIT will be based on the consolidated earnings and
profits of the Management Company (including each of its subsidiaries) at the
time of the InterMation Spin-off (the "Consolidated Earnings"). The Consolidated
Earnings will be determined, in part, through an earnings and profits study
based on (i) the corporate tax returns of the Management Company for the years
beginning on the Management Company's date of incorporation through December 31,
1994 and (ii) consolidated earnings and profits for the 1995 period ending on
the date of the InterMation Spin-off. The Consolidated Earnings will then be
allocated between the Management Company and InterMation based on the relative
fair market values of the two separate corporations at the time of the
InterMation Spin-off. As the basis for this allocation, the Management Company
will use the share consideration paid in the Merger (exclusive of Contingent
Shares) for the value of the Management Company and will obtain an independent
valuation for InterMation. The amount of accumulated earnings and profits
allocated to the Management Company will then be adjusted for its activities
occurring between the date of the InterMation Spin-off and the Closing Date of
the Merger to arrive at the amount of accumulated earnings and profits acquired
by the Shurgard REIT (the "Acquired Earnings").
89
<PAGE>
The amount of the Acquired Earnings is estimated between $6,100,000 and
$6,800,000 depending on the relative values of InterMation assumed for
allocating the Consolidated Earnings on the InterMation Spin-off. This estimate
also assumes, among other things, (i) a reduction in the Consolidated Earnings
resulting from the exercise of stock options and the payment of cash bonuses to
pay taxes associated with such exercise and (ii) a reduction in the Consolidated
Earnings resulting from payment of stock and cash bonuses during 1994 and 1995.
Because of the uncertainty of these and other assumptions, the amount of
Acquired Earnings may differ from the range estimated above.
To determine the amount of distributions required to be made by the Shurgard
REIT during 1995 to distribute these Acquired Earnings, the Shurgard REIT must
determine the source of each of its distributions made during 1995. Only those
distributions that are sourced to the Acquired Earnings will be treated as
reducing such earnings and profits. In determining the source of a distribution,
consideration should generally be given first, to the earnings and profits of
the taxable year and second, to earnings and profits accumulated in prior years.
Accordingly, to distribute the Acquired Earnings, the Shurgard REIT must
distribute during 1995 all current year earnings and profits plus the sum of (i)
the amount of any accumulated and undistributed 1994 Shurgard REIT earnings and
profits and (ii) the amount of the Acquired Earnings.
Furthermore, if annual distributions are made only in cash and are in excess
of current year earnings and profits, then a proportionate amount of each
distribution will be treated as sourced from current year earnings and profits.
That portion of each such distribution that is not sourced to current year
earnings and profits will be sourced to earnings and profits accumulated in
prior years that ARE AVAILABLE AT THE TIME OF THE DISTRIBUTION. Accordingly, any
distribution made by the Shurgard REIT during 1995 but prior to the Closing will
not be treated as partially reducing the Acquired Earnings. This may cause the
Shurgard REIT to further increase the amount of its distributions during 1995 to
eliminate the Acquired Earnings should the Closing extend beyond the date of its
first quarter distribution.
Based on its quarterly distribution history during 1994, the Shurgard REIT
will be required to increase its distributions during 1995 to distribute the
Acquired Earnings. For example, assume that the Shurgard REIT has annualized
taxable earnings and profits for 1995 equal to $29,000,000, $2,000,000 of
accumulated and undistributed earnings and profits attributable to 1994 and
$6,800,000 of Acquired Earnings. Assuming further that the Merger occurs prior
to the first quarterly distribution, the Shurgard REIT would be required to
distribute $37,800,000 during 1995 to retain REIT status. Assuming that total
post-Merger outstanding shares remain at 18,281,411, the amount of distributions
per share equals approximately $2.07. Any increase in distributions is intended
to be paid out of Shurgard REIT operating cash flow. The Shurgard REIT may
accomplish these additional distributions by either increasing its quarterly
distribution, making special distributions during the year or making a special
year-end distribution. A year-end distribution must be declared within the last
three months of the year and paid prior to January 31, 1996. This distribution
would be treated for all purposes as a 1995 dividend to the Shurgard REIT
shareholders even though received by the shareholders after year-end. As a
result of these increased distributions, the Shurgard REIT shareholders will
recognize additional dividend income to the extent that such distributions
received represent accumulated earnings and profits of the Shurgard REIT. Any
amounts received by shareholders in excess of such earnings and profits will be
treated as either a return of capital or capital gain. See "-- Tax Consequences
to Management Company Shareholders Receiving Shurgard Class A Common Stock --
Federal Income Taxation of Shurgard REIT Shareholders."
The calculation of the amount of Acquired Earnings is subject to challenge
by the IRS. First, there can be no assurance that the IRS will not examine the
Management Company's prior tax returns and propose adjustments to increase its
taxable income. Because the earnings and profits study used to calculate the
amount of Acquired Earnings is based on these returns, such adjustments may
increase the amount of the Acquired Earnings, particularly since the IRS may
consider all taxable years as open for review for purposes of determining
earnings and profits. Second, there can also be no assurance that the IRS will
respect the valuations used for purposes of allocating the Consolidated
90
<PAGE>
Earnings between the Management Company and InterMation on the InterMation
Spin-off. If the IRS determines that the Management Company has a
proportionately greater value than InterMation at the time of the InterMation
Spin-off, the amount of Acquired Earnings would proportionately increase.
In the event the IRS subsequently determines that it failed to distribute
all the Acquired Earnings, the Shurgard REIT may make an additional distribution
within 90 days of such determination to distribute these earnings and profits
plus pay the IRS an interest charge based on 50% of such amount not previously
distributed. If such additional distribution is made, the Shurgard REIT may
retain its REIT qualification for years subsequent to the Merger. Nonetheless,
if such determination is made, the Shurgard REIT would not be treated as a REIT
for the year of the Merger.
ACQUISITION OF AFFILIATED SHURGARD PARTNERSHIP INTERESTS. In the Merger,
the Shurgard REIT will acquire interests in various partnerships that act as
general partners in partnerships that own and operate self-storage facilities.
The Shurgard REIT, for purposes of satisfying its REIT asset and income tests,
will be treated as if it owns a proportionate share of each of the assets of the
these partnerships attributable to such interests. For these purposes, the
Shurgard REIT's interest in each of the partnerships will be determined in
accordance with its capital interest in such partnership. The character of the
various assets in the hands of the partnership and the items of gross income of
the partnership will retain their same character in the hands of the Shurgard
REIT for these purposes. Accordingly, to the extent the partnership receives
real estate rentals and holds real property, a proportionate share of such
qualified income and assets, based on the Shurgard REIT's capital interest in
the partnerships, will be treated as qualified rental income and real estate
assets of the Shurgard REIT for purposes of determining its REIT
characterization. It is expected that substantially all of the properties of the
partnerships will constitute real estate assets and generate qualified rental
income for these REIT qualification purposes.
The Shurgard REIT will acquire interests in each of these partnerships that
entitle the Shurgard REIT to a percentage of profits in excess of the percentage
of total capital contributed to the partnership. Regulatory authority does not
specifically address this situation and it is uncertain, based on existing
authority, what the treatment of these profit interests will be when applying
these rules. For example, based on the existing rules, if the amount received by
a REIT based on a profit interest in a partnership is in excess of it capital
interest in the underlying gross income, the amount of such excess should be
entirely disregarded for these REIT qualification purposes. Furthermore, these
rules do not specifically address the manner in which a REIT is to determine its
capital interest. There is no reference to the capital account or special
allocation rules of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder and these rules do not address acquisitions of
partnership interests for valuable consideration. Based on the fact that the
Shurgard REIT is acquiring the Partnership Interests for valuable consideration
and at a time when the Partnership assets may have some appreciated capital
value, the Shurgard REIT may be treated as having a capital percentage in the
Partnerships at the time of the Merger. This may increase the amount of
qualifying income recognized by the Shurgard REIT. In the event the IRS
determines that the percentage of capital contributed is the proper indicator of
a capital interest, however, a portion of the income recognized by the Shurgard
REIT attributable to its Partnership Interests may be disregarded when applying
these gross income requirements.
TAX CONSEQUENCES TO MANAGEMENT COMPANY SHAREHOLDERS RECEIVING SHURGARD CLASS A
COMMON STOCK
The Management Company shareholders will be receiving shares of Shurgard
Class A Common Stock as consideration for the Merger. The Shurgard REIT is a
publicly traded corporation that has elected to qualify as a REIT, as defined in
Section 856 of the Code. As a REIT, the Shurgard REIT avoids paying federal
income tax on income that it currently distributes to its shareholders. If the
Shurgard REIT at any time fails to qualify as a REIT, the Shurgard REIT will be
taxed on its
91
<PAGE>
distributed income, thereby reducing the amount of cash available for
distribution to its shareholders. Accordingly, the continued qualification of
the Shurgard REIT as a REIT is a significant consideration for Management
Company shareholders deciding to vote in favor of approval of the Merger.
OVERVIEW OF REIT QUALIFICATION RULES. The following summarizes the basic
requirements for REIT status:
(i) The Shurgard REIT stock must be transferable and held by more than
100 shareholders, and no more than 50% of the value of the Shurgard REIT's
stock may be held by five or fewer individuals.
(ii) Generally, 75% (by value) of the Shurgard REIT's investments must
be in real estate, mortgages secured by real estate, cash or government
securities.
(iii) The Shurgard REIT's gross income must meet three income tests:
(a) At least 75% of the gross income must be derived from specific
real estate sources;
(b) At least 95% of the gross income must be from the real estate
sources includable in the 75% test, or from dividends, interest or gains
from the sale or disposition of stock and securities; and
(c) Less than 30% of the gross income may be derived from the sale of
real estate assets held for less than four years, from the sale of
certain "dealer" properties or from the sale of stock or securities
having a short-term holding period.
(iv) The Shurgard REIT must distribute to its shareholders in each
taxable year an amount at least equal to 95% of the Shurgard REIT's "REIT
taxable income" (which is generally equivalent to taxable ordinary income).
The discussion set forth below explains these REIT qualification
requirements in greater detail. It also addresses how these highly technical
rules may be expected to impact the Shurgard REIT in its operations, noting
areas of uncertainty that perhaps could lead to adverse consequences to the
Shurgard REIT and its shareholders.
SHARE OWNERSHIP. The shares of the Shurgard REIT are fully transferable,
with the exception of certain shares that are subject to contractual transfer
restrictions. Furthermore, the Shurgard REIT has more than 100 shareholders and
its Certificate of Incorporation provides, to decrease the possibility that the
Shurgard REIT will ever be closely held, that no individual, corporation or
partnership is permitted to acquire more than 9.8% of the number of outstanding
shares of Shurgard Class A Common Stock. This limitation may be adjusted,
however, by the Shurgard REIT Board in certain circumstances. Shares acquired in
excess of such limit may be redeemed by the Shurgard REIT. In addition, the
Certificate of Incorporation provides that shares acquired in excess of such
limit will automatically convert into nondividend-paying and nonvoting shares of
excess stock. See "DESCRIPTION OF SHURGARD REIT CAPITAL STOCK -- Excess Stock."
Contractual or securities law restrictions on transferability should be
disregarded for purposes of determining the transferability of REIT shares.
NATURE OF ASSETS. On the last day of each calendar quarter, at least 75% of
the value of the Shurgard REIT's total assets must consist of (i) real estate
assets (including interests in real property interest and mortgages on loans
secured by real property), (ii) cash and cash items (including receivables), and
(iii) government securities (collectively, the "real estate assets"). In
addition, no more than 25% of the value of the Shurgard REIT's assets may
consist of securities (other than government securities). Finally, except for
certain "qualified REIT subsidiaries," as described below, the securities of any
one nongovernmental issuer may not represent more than 5% of the value of the
Shurgard REIT's total assets or 10% of the outstanding voting securities of any
one issuer. There are no investment restrictions on the remainder of the
Shurgard REIT's assets.
92
<PAGE>
While, as noted above, a REIT cannot own more than 10% of the outstanding
voting securities of any single nongovernmental issuer, an exception to this
rule permits REITs to own "qualified REIT subsidiaries." A "qualified REIT
subsidiary" is any corporation in which 100% of its stock is owned by the REIT
at all times during which the corporation was in existence. The Shurgard REIT
currently has three wholly owned corporate subsidiaries that were formed and
owned at all times during their existence by the Shurgard REIT. These
corporations should be treated as "qualified REIT subsidiaries" and should not
adversely affect the Shurgard REIT's qualification as a REIT.
INCOME TESTS. To maintain its qualification as a REIT, the Shurgard REIT
must meet three gross income requirements that must be satisfied annually.
First, at least 75% of the REIT's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the REIT's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property investments, and
from dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain from the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the REIT's gross income
(including gross income from prohibited transactions) for each taxable year.
Rents received by the Shurgard REIT on the lease of self-storage facilities
will qualify as "rents from real property" in satisfying the gross income
requirements for a REIT described above only if several conditions are met.
First, the amount of rent must not be based in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts of sales. Second, the
Code provides that rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income test if the Shurgard REIT, or an
owner of 10% or more of the Shurgard REIT, directly or constructively owns 10%
or more of such tenant (a "Related-Party Tenant"). Third, if rent attributable
to personal property leased in connection with the lease of real property is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." The Shurgard REIT does not anticipate charging rent for any portion
of any property that is based in whole or in part on the income or profits of
any person and the Shurgard REIT does not anticipate receiving rents in excess
of a de minimis amount from Related-Party Tenants. Furthermore, the Shurgard
REIT does not lease personal property in connection with its rental of
self-storage facilities.
Finally, for rents to qualify as "rents from real property," the Shurgard
REIT must not operate or manage the property or furnish or render services to
tenants other than through an "independent contractor" from whom the Shurgard
REIT derives no revenue. As described above, the "independent contractor"
requirement does not apply to the extent that services provided by the Shurgard
REIT are usually and customarily rendered in connection with the rental of space
for occupancy only and are not otherwise considered "rendered to the occupant."
The Management Company has, on behalf of the Shurgard REIT, obtained a private
letter ruling from the IRS ruling that the management services provided by the
Shurgard REIT for its own properties after the Merger will not cause the rents
received by the Shurgard REIT to be treated as other than "rents from real
property." See "-- Consequences of the Merger on the Shurgard REIT's
Qualification as a REIT -- The Shurgard REIT's Self-Administration of Management
Services." The Shurgard REIT may, however, receive fees and consideration for
performance of management and administrative services with respect to properties
that are not owned entirely by the Shurgard REIT. Such income will not qualify
under either the 75% or
93
<PAGE>
95% gross income test and, if it exceeds 5% of the Shurgard REIT's total gross
income, may adversely affect the Shurgard REIT's continued qualification as a
REIT. See "-- Consequences of the Merger on the Shurgard REIT's Qualification as
a REIT -- Nonqualifying Income."
If the Shurgard REIT fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Shurgard REIT's
failure to meet such test was due to reasonable cause and not willful neglect
and the Shurgard REIT attaches a schedule of its income sources to its tax
return that does not fraudulently or intentionally exclude any income sources.
As discussed above, even if these relief provisions apply, a tax would be
imposed with respect to such excess income. See "-- Consequences of the Merger
on the Shurgard REIT's Qualification as a REIT -- Nonqualifying Income."
ANNUAL DISTRIBUTION REQUIREMENTS. Each year, the Shurgard REIT must have a
deduction for dividends paid (determined under Section 561 of the Code) to its
shareholders in an amount equal to (i) 95% of the sum of (a) its "REIT taxable
income" as defined below and (b) any net income from foreclosure property less
the tax on such income, minus (ii) any "excess noncash income," as defined
below. "REIT taxable income" is the taxable income of a REIT computed without a
deduction for dividends paid and excluding any net capital gain. REIT taxable
income is further adjusted by certain items, including, without limitation, an
exclusion for net income from foreclosure property, a deduction for the excise
tax on the greater of the amount by which the REIT fails the 75% or the 95%
income test, and an exclusion for an amount equal to any net income derived from
prohibited transactions. "Excess noncash income" means the excess of certain
amounts that the REIT is required to recognize as income in advance of receiving
cash, such as original issue discount on purchase money debt, over 5% of the
REIT taxable income before deducting for dividends paid and excluding any net
capital gain.
Such distributions must be made in the taxable year to which they relate, or
in the following taxable year if declared before the REIT timely files its tax
return for such year and is paid on or before the first regular dividend payment
after such declaration. To the extent that the Shurgard REIT does not distribute
all of its net capital gain or distributes at least 95%, but less than 100%, of
its REIT taxable income, as adjusted, it will be subject to tax on the
undistributed amount based on regular corporate tax rates. Furthermore, if the
Shurgard REIT should fail to distribute during such calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain income for such year, and (iii) any undistributed taxable income
from prior periods, the Shurgard REIT would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
Under certain circumstances, the Shurgard REIT may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year that may be included in the Shurgard
REIT's deduction for dividends paid for the earlier year. Thus, the Shurgard
REIT may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Shurgard REIT will be required to pay to the IRS
interest based on the amount of any deduction taken for deficiency dividends.
FAILURE OF THE SHURGARD REIT TO QUALIFY AS A REIT. If the Shurgard REIT
fails to qualify for taxation as a REIT in any taxable year, and the relief
provisions do not apply, the Shurgard REIT would be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to shareholders in any year in which the Shurgard
REIT fails to qualify would not be deductible by the Shurgard REIT nor would
they be required to be made. In such an event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders would be
taxable as ordinary income and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory relief provisions, the
Shurgard REIT would also be disqualified from taxation as a
94
<PAGE>
REIT for the four taxable years following the year during which such
qualification was lost. It is not possible to state whether in all circumstances
the Shurgard REIT would be entitled to such statutory relief.
FEDERAL INCOME TAXATION OF SHURGARD REIT SHAREHOLDERS. As long as the
Shurgard REIT qualifies for federal income taxation as a REIT, distributions
made to the Shurgard REIT shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be recognized by
the shareholders as ordinary income for federal income tax purposes. None of
these distributions will be eligible for the dividends received deduction for
corporate shareholders. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Shurgard REIT's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held his or her stock in the
Shurgard REIT. Shurgard REIT shareholders, however, may be required to treat up
to 20% of certain capital gain dividends as ordinary income.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares. Shareholders will be required to
reduce the tax basis of their shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a shareholder who holds
his or her shares as a dealer). The tax basis as so reduced will be used in
computing the capital gain or loss, if any, realized on the sale of the shares.
Any loss upon a sale or exchange of shares by a shareholder who held such shares
for six months or less (after applying certain holding period rules) will
generally be treated as long-term capital loss to the extent such shareholder
previously received capital gain distributions with respect to such shares.
Shareholders may not include in their individual federal income tax returns
any net operating losses or capital losses of the Shurgard REIT. In addition,
any distribution declared by the Shurgard REIT in October, November or December
of any year payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Shurgard REIT and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by the Shurgard REIT no later than January 31 of the following year. The
Shurgard REIT may contemplate making such a year-end distribution to rid itself
of accumulated earnings and profits acquired from the Management Company that
are attributable to non-REIT years. See "-- Consequences of the Merger on the
Shurgard REIT's Qualification as a REIT -- Distributions of Accumulated Earnings
and Profits Attributable to Non-REIT Years."
BACKUP WITHHOLDING. Distributions from the Shurgard REIT will ordinarily
not be subject to withholding of federal income taxes. However, the Shurgard
REIT will be required to withhold tax at the rate of 31% from distributions paid
to those shareholders who (i) have failed to furnish their taxpayer
identification number ("TIN") to the Shurgard REIT; (ii) have, according to the
IRS, furnished an incorrect TIN to the Shurgard REIT; (iii) have, according to
the IRS, underreported interest, dividends or patronage dividend income in the
past; or (iv) have failed to satisfy the payee certification requirements of
Section 3406 of the Code. Each shareholder will be required to provide and
certify his or her correct TIN and to certify that he or she is an exempt
recipient. Furthermore, the Shurgard REIT may be required to withhold a portion
of capital gain distributions to any shareholder who fails to certify his or her
nonforeign status to the Shurgard REIT.
STATE AND LOCAL TAXES
The Shurgard REIT or its shareholders, or both, may be subject to state or
local taxes in other jurisdictions such as those in which the Shurgard REIT may
be deemed to be engaged in activities or in which shareholders reside or own
property or other interests. Such tax treatment of the Shurgard REIT and its
shareholders in states having taxing jurisdiction over them may differ from the
federal
95
<PAGE>
income tax treatment described in this Proxy Statement/Prospectus. Each
shareholder should consult his or her tax advisor as to the status of the
Shurgard Class A Common Stock under the respective state laws applicable to him
or her.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
APPOINTMENT OF OFFICERS AND A DIRECTOR OF THE SHURGARD REIT
As a result of the Merger, Charles K. Barbo will be appointed as the
Shurgard REIT's Chairman of the Board, President and Chief Executive Officer.
Mr. Barbo will serve in such capacities until his successor has been duly
elected or appointed. Mr. Barbo is a co-founder of the Management Company, and
currently serves as its Chairman of the Board and President. As of December 31,
1994, Mr. Barbo beneficially owned 1,724,600 shares of Management Company Common
Stock, constituting a 41% beneficial ownership interest in the Management
Company. Upon completion of the Merger, Mr. Barbo will beneficially own 730,853
shares of Shurgard REIT Common Stock, constituting a 3.5% ownership interest in
the Shurgard REIT. As a condition to the Closing, Mr. Barbo will enter into a
noncompetition agreement with the Shurgard REIT, but will otherwise have no
written employment contract or formal arrangements concerning his title, powers,
compensation or tenure.
In addition, the Merger Agreement provides that Harrell L. Beck and Kristin
H. Stred will each be appointed as a Senior Vice President of the Shurgard REIT.
Mr. Beck will also retain his current positions of Treasurer and Chief Financial
Officer of the Shurgard REIT, and Ms. Stred will retain her current positions of
Secretary and General Counsel of the Shurgard REIT. Michael Rowe, Executive Vice
President and Director of Storage Operations of the Shurgard REIT, and David K.
Grant, Executive Vice President and Director of Real Estate Investment of the
Shurgard REIT, currently hold similar positions with the Management Company.
They will remain in their positions on behalf of the Shurgard REIT after the
Merger.
ACCELERATION OF THE MANAGEMENT COMPANY STOCK OPTIONS
Holders of outstanding options to purchase shares of Management Company
Common Stock will have the right to exercise such options immediately prior to
the closing of the Merger, whether or not the vesting requirements for such
options have been satisfied. The executive officers of the Shurgard REIT hold
options to purchase an aggregate of 74,500 shares of Management Company Common
Stock, the vesting of 61,168 of which will be accelerated. All outstanding
options to purchase shares of Management Company Common Stock that are not
exercised prior to the Closing will terminate.
INDEMNIFICATION OF DIRECTORS AND OFFICERS PURSUANT TO THE MERGER AGREEMENT
Under the Merger Agreement, the Shurgard REIT has agreed to keep in effect
provisions in its Certificate of Incorporation and By-Laws providing for
limitation of director liability and indemnification of directors, officers,
employees and agents at least to the extent such persons are entitled thereto
under the Articles of Incorporation and By-Laws of the Management Company as of
December 19, 1994, subject to Delaware law. To the extent the Shurgard REIT's
Certificate of Incorporation and By-Laws do not provide for indemnification of
directors or officers of predecessor corporations, the Shurgard REIT will,
subject to Delaware law, contractually assume the indemnification obligations
under the Management Company's By-Laws. In addition, such provisions will not be
amended, repealed or otherwise modified in any manner that would adversely
affect the rights of individuals who at any time prior to the Effective Time
were directors, officers, employees or agents of the Management Company in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by the Merger
Agreement), unless such modification is required by law.
The Merger Agreement provides that if an officer, director or affiliate of
the Management Company (collectively, the "Litigation Parties") is involuntarily
made a party to a lawsuit in connection with the Merger, the Shurgard REIT will
defend, indemnify and pay the costs associated with the defense of such
Litigation Parties. In addition, if it is deemed appropriate, such Litigation
Parties may retain separate legal counsel to defend actions brought in
connection with the Merger and the
96
<PAGE>
Shurgard REIT will likewise pay the associated costs. Further, the Management
Company and the Shurgard REIT have each agreed in the Merger Agreement not to
enter into settlement proceedings without the consent of the other. The Shurgard
REIT will have no duty to indemnify any of the Litigation Parties for any
liability imposed under a final judgment to the extent such judgment has been
finally adjudicated and determined to have been the result of an untrue
statement or an omission of a material fact made by the Management Company in
certain sections of the Registration Statement or this Proxy
Statement/Prospectus, or as a result of fraud, intentional misconduct or knowing
violation of the law by such Litigation Parties.
CONTINGENT SHARES
Contingent Shares will be issued based on the future transactions relating
to interests in or assets of the Partnerships or the appraised value of such
assets, including transactions with the Shurgard REIT. See "THE MERGER --
Contingent Shares." The general partner of the Partnerships will manage and
control the disposition of such Partnerships and their assets. Mr. Barbo is one
of the general partners of five of the Partnerships. He also has the right to
receive Contingent Shares, if any, arising from such transactions. Therefore,
his interests may conflict with those of the Shurgard REIT in connection with
transactions resulting in the issuance of Contingent Shares.
SHURGARD REALTY ADVISORS
The Management Company has agreed to sell SRA to Shurgard General Partner,
Inc., a corporation owned by Mr. Barbo, prior to the Closing, for $25,000, which
price is equal to the net capital currently required to be maintained in SRA.
The consideration will be delivered in the form of a note, to be payable upon
liquidation of SRA, or the date SRA allows its NASD broker-dealer license to
lapse, whichever occurs sooner. See "THE MERGER -- Shurgard Realty Advisors."
COMPARATIVE PER SHARE MARKET INFORMATION
THE SHURGARD REIT
Market prices for the shares of Shurgard Class A Common Stock are reported
on the Nasdaq National Market. The table below sets forth for the fiscal periods
indicated the high and low sale prices per share of Shurgard Class A Common
Stock on the Nasdaq National Market as reported in published financial sources,
and distributions declared. For current price information, the Shurgard REIT
shareholders and the Management Company shareholders are urged to consult
publicly available sources.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
SHURGARD CLASS A DISTRIBUTIONS
COMMON STOCK DECLARED (1)
------------------ ------------
HIGH LOW
------ ------
<S> <C> <C> <C>
1994
First Quarter (beginning March 28,
1994)................................. $23.75 $22.00 $--
Second Quarter......................... 24.25 21.00 .14
Third Quarter.......................... 23.25 20.50 .44
Fourth Quarter......................... 23.00 17.75 .44
1995
First Quarter (through February 14,
1995)................................. 23.75 19.50
<FN>
- ------------------------
(1) Distributions are declared quarterly by the Shurgard REIT Board based on
financial results for the prior quarter.
</TABLE>
On December 19, 1994, the last full trading day prior to announcement of the
execution of the Merger Agreement, the reported Nasdaq National Market closing
price per share of Shurgard Class A Common Stock was $18.75. On February 14,
1995, the most recent available date prior to printing this Proxy
Statement/Prospectus, the reported Nasdaq National Market closing price per
share of Shurgard Class A Common Stock was $22.25.
97
<PAGE>
Holders of shares of Shurgard REIT Common Stock are entitled to receive
distributions when, as and if declared by the Shurgard REIT Board out of any
assets legally available for payment. The Shurgard REIT is required to
distribute annually to its shareholders at least 95% of its "REIT taxable
income," which, as defined by the relevant tax statutes and regulations, is
generally equivalent to net taxable ordinary income. See "POLICIES REGARDING
INVESTMENT AND CERTAIN OTHER ACTIVITIES -- Policies With Respect to Dividends
and Certain Other Activities -- Dividend Policy."
THE MANAGEMENT COMPANY
There is no public market for shares of Management Company Common Stock.
There were 25 holders of record of shares of Management Company Common Stock as
of December 31, 1994. The Management Company has not paid any cash distributions
since its inception.
DESCRIPTION OF SHURGARD REIT CAPITAL STOCK
GENERAL
The authorized capital stock of the Shurgard REIT is divided into four
classes: 120,000,000 shares of Class A Common Stock, par value $.001 per share,
500,000 shares of Class B Common Stock, par value $.001 per share, 40,000,000
shares of Preferred Stock, par value $.001 per share, and 160,000,000 shares of
Excess Stock, par value $.001 per share.
COMMON STOCK
The two classes of authorized Common Stock of the Shurgard REIT have
substantially similar rights. Except as provided below, all shares of Class A
Common Stock and Class B Common Stock are entitled to share equally in all
distributions and in the assets available for distribution upon liquidation,
subject to repayment of the Indebtedness of the Shurgard REIT and the prior
rights of the Preferred Stock. Holders of Class A Common Stock and Class B
Common Stock are entitled to receive distributions as declared by the Shurgard
REIT Board out of any assets of the Shurgard REIT legally available for payment.
There are no preemptive rights or other rights to subscribe for any shares
associated with the Class A Common Stock and the Class B Common Stock. The
transfer agent and registrar for the Class A Common Stock and the Class B Common
Stock is Gemisys Corporation.
Holders of Class A Common Stock and Class B Common Stock are entitled to one
vote per share. Each holder of Class B Common Stock was entitled to a loan from
the Shurgard REIT in an amount necessary to satisfy the holder's general partner
capital obligation to certain Partnerships that were acquired by the Shurgard
REIT in the Consolidation. Each loan is secured by a pledge of the Class B
Common Stock held by the borrowing shareholder. Upon repayment of a portion of
the loan, that portion of the Class B Common Stock equal to the percentage of
the loan principal repaid is released from the pledge and is convertible, on a
share-for-share basis, into shares of Class A Common Stock. Class B Common Stock
is not publicly traded but is transferable upon its release from the pledge.
PREFERRED STOCK
The Shurgard REIT Board is authorized, without further action of the
shareholders of the Shurgard REIT, to issue up to 40,000,000 shares of Preferred
Stock in one or more classes or series and to fix the number of shares
constituting any such series, the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights, dividend rate,
terms of redemption (including sinking fund provisions), redemption price or
prices, conversion rights and liquidation preferences of the shares constituting
any class or series. For example, the Shurgard REIT Board is authorized to issue
a series of Preferred Stock that would have the right to vote, separately or
with any other series of Preferred Stock, on any proposed amendment to the
Certificate of Incorporation or any other proposed corporate action, including
business combinations or other transactions. Except as described below with
respect to the Rights Agreement, the Shurgard REIT Board does not presently
contemplate the issuance of any Preferred Stock and is not aware of any pending
or proposed transactions that would be affected by such issuance.
98
<PAGE>
One of the effects of undesignated Preferred Stock may be to enable the
Shurgard REIT Board to render more difficult or to discourage an attempt to
obtain control of the Shurgard REIT by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Shurgard
REIT's management. The issuance of the shares of Preferred Stock pursuant to the
Shurgard REIT Board's authority described above may adversely affect the rights
of the holders of the Shurgard REIT Common Stock. For example, Preferred Stock
issued by the Shurgard REIT after the Consolidation may rank prior to the
Shurgard REIT Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of the Shurgard REIT Common Stock.
EXCESS STOCK
The Certificate of Incorporation provides that the Shurgard REIT may prevent
the transfer and/ or call for redemption of shares of the Shurgard REIT (whether
Common or Preferred Stock) if more than 50% of the outstanding shares would be
owned, directly or indirectly, by five or fewer individuals, if one person would
own, directly or indirectly, more than 9.8% of the total outstanding shares (or
such higher percentage as may be determined by the Shurgard REIT Board (the
"Ownership Limit")). In addition, the Shurgard REIT may prevent such transfers
and/or call for redemption of such shares if the Shurgard REIT Board determines
in good faith that the shares have or may become concentrated to the extent that
may prevent the Shurgard REIT from qualifying as a REIT. See "FEDERAL INCOME TAX
CONSEQUENCES -- Tax Consequences to Management Company Shareholders Receiving
Shurgard Class A Common Stock -- Share Ownership." Any class or series of
Preferred Stock may be subject to these restrictions if so stated in the
resolutions providing for the issuance of such Preferred Stock. Any corporate
investor wishing to acquire or own more than 9.8% of the total outstanding
shares may petition the Shurgard REIT Board in writing for approval. The
Shurgard REIT Board will grant such request unless it determines in good faith
that the acquisition or ownership of such shares would jeopardize the Shurgard
REIT's qualification as a REIT under existing federal tax laws and regulations.
Any corporate investor intending to acquire shares in excess of the Ownership
Limit must given written notice to the Shurgard REIT of the proposed acquisition
no later than the date on which the transaction occurs and must furnish such
opinions of counsel, affidavits, undertakings, agreements and information as may
be required by the Shurgard REIT Board to evaluate or to protect against any
adverse effect of the transfer. Notwithstanding the foregoing, the Shurgard REIT
Board is not required to grant a request to adjust the Ownership Limit if the
Shurgard REIT Board believes, based on advice from legal counsel, that the
granting of such request would cause the Shurgard REIT Board to breach its
fiduciary duties to the shareholders of the Shurgard REIT.
If, despite the restrictions noted above, any person acquires shares in
excess of the Ownership Limit (applying certain constructive ownership
provisions), the shares most recently acquired by such person in excess of the
limit will be automatically exchanged for an equal number of shares of Excess
Stock. Shares of Excess Stock have the following characteristics: (i) owners of
Excess Stock are not entitled to exercise voting rights with respect to the
Excess Stock; (ii) Excess Stock shall not be deemed outstanding for purposes of
determining a quorum at any annual or special meeting of shareholders; and (iii)
Excess Stock will not be entitled to any dividends or other distributions. Any
person who becomes an owner of Excess Stock is obligated to immediately give the
Shurgard REIT written notice of such fact and certain information required by
the Certificate of Incorporation. Excess Stock is also deemed to have been
offered for sale to the Shurgard REIT or its designee for a period of 120 days
from the later of (a) the date of the transfer that created the Excess Stock if
the Shurgard REIT has actual notice that such transfer created the Excess Stock
and (b) the date on which the Shurgard REIT Board determines in good faith that
the transfer creating the Excess Stock has occurred. The Shurgard REIT has the
right during such time period to accept the deemed offer or, in the Shurgard
REIT Board's discretion, the Shurgard REIT may acquire and sell, or cause the
owner to sell, the Excess Stock. The price for the Excess Stock will be the
lesser of (i) the closing price of the shares exchanged into Excess Stock on the
national stock exchange on which the shares are listed as of
99
<PAGE>
the date the Shurgard REIT or its designee acquires the Excess Stock or, if no
such price is available, as determined in good faith by the Shurgard REIT Board
and (ii) the price per share paid by the owner of the shares that were exchanged
into Excess Stock or, if no purchase price was paid, the fair market value of
such shares on the date of acquisition as determined in good faith by the
Shurgard REIT Board. Upon such transfer or sale, the Excess Stock will
automatically convert to Shurgard Class A Common Stock with all voting and
dividend rights effective as of the date of such conversion; provided, however,
that the owner will not be entitled to receive dividends payable with respect to
Shurgard Class A Common Stock for the period during which the shares were Excess
Stock. All certificates of Shurgard Class A Common Stock and Shurgard Class B
Common Stock, any other series of Common Stock, and any class or series of
Preferred Stock that is made subject to the restrictions outlined above will
bear a legend referring to the restrictions.
SHAREHOLDER RIGHTS PLAN
Pursuant to the Rights Agreement dated as of March 17, 1994, between the
Shurgard REIT and Gemisys Corporation, as Rights Agent (the "Rights Agreement"),
holders of shares of Shurgard Class A Common Stock have certain rights to
purchase shares of Shurgard REIT Series A Junior Participating Preferred Stock
(the "Preferred Shares") exercisable only in certain circumstances (the
"Rights"). The Rights, which are represented by certificates for the Shurgard
Class A Common Stock, trade together with the Shurgard Class A Common Stock
until a Distribution Date (as defined below). Each Right, when it becomes
exercisable as described below, will entitle the registered holder to purchase
one one-hundredth of a Preferred Share at a price of $65 per one one-hundredth
of a Preferred Share (subject to adjustment, the "Purchase Price").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 10% or more of the outstanding
Shurgard Class A Common Stock and (ii) 10 business days (or such later date as
may be determined by action of the Shurgard REIT Board prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 10% or more of such outstanding Shurgard Class
A Common Stock (the earlier of such dates being called the "Distribution Date"),
the Rights will be evidenced, with respect to any of the Shurgard Class A Common
Stock certificates outstanding as of March 25, 1994 (the "Rights Record Date"),
by such Shurgard Class A Common Stock certificate, with a copy of a Summary of
Rights to Purchase Preferred Shares (the "Summary of Rights") attached thereto.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Shurgard Class A Common Stock. Until the Distribution Date (or
earlier redemption or expiration of the Rights), new Shurgard Class A Common
Stock certificates issued after the Rights Record Date upon transfer or new
issuance of Shurgard Class A Common Stock will contain a notation incorporating
the Rights Agreement by reference. Until the Distribution Date (or earlier
redemption or expiration of the Rights), the surrender for transfer of any
certificates for Shurgard Class A Common Stock outstanding as of the Rights
Record Date, even without such notation or a copy of the Summary of Rights being
attached thereto, will also constitute the transfer of the Rights associated
with the Shurgard Class A Common Stock represented by such certificate. As soon
as practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Shurgard Class A Common Stock as of the close of business on the Distribution
Date, and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on March 17, 2004 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Shurgard REIT, in each case as described below.
100
<PAGE>
The Purchase Price payable and the number of Preferred Shares or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then-current market price of the Preferred Shares, or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right is also subject to
adjustment in the event of a stock split of the Shurgard Class A Common Stock or
a dividend on the Shurgard Class A Common Stock payable in Shurgard Class A
Common Stock or subdivisions, consolidations or combinations of the Shurgard
Class A Common Stock occurring, in any such case, prior to the Distribution
Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each holder of Preferred Shares will be entitled to a minimum
preferential quarterly dividend payment of the greater of $1 per share and a per
share dividend of 100 times the aggregate dividends declared per share of
Shurgard Class A Common Stock. In the event of liquidation, the holders of
Preferred Shares will be entitled to a minimum preferential liquidation payment
of $100 per share or, if greater, to an aggregate per share payment of 100 times
the aggregate payment made per share of Shurgard Class A Common Stock. Each
Preferred Share will have 100 votes, voting together with the Shurgard Class A
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Shurgard Class A Common Stock are exchanged, each
Preferred Share will be entitled to receive 100 times the amount received per
share of Shurgard Class A Common Stock. These rights are protected by customary
antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
share of Shurgard Class A Common Stock.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, proper provision will be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive upon exercise
that number of shares of Shurgard Class A Common Stock having a market value of
two times the exercise price of the Right. If the Shurgard REIT is acquired in a
merger or other business combination transaction, or 50% or more of its
consolidated assets or earning power are sold, proper provision will be made so
that each holder of a Right will thereafter have the right to receive, upon the
exercise thereof at the then-current exercise price of the Right, that number of
shares of common stock of the acquiring company that at the time of such
transaction will have a market value of two times the exercise price of the
Right.
At any time after any person becomes an Acquiring Person and prior to the
acquisition by such person or group of 50% or more of the outstanding Shurgard
Class A Common Stock, the Shurgard REIT Board may exchange the Rights (other
than Rights owned by such person or group that have become void), in whole or in
part, at an exchange ratio of one share of Shurgard REIT Common Stock, or one
one-hundredth of a Preferred Share (or of a share of a class or series of the
Shurgard REIT's Preferred Stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions that are integral multiples of one one-hundredth of a
101
<PAGE>
Preferred Share, which may, at the election of the Shurgard REIT, be evidenced
by depositary receipts) and, in lieu thereof, an adjustment in cash will be made
based on the market price of the Preferred Shares on the last trading day prior
to the date of exercise.
At any time prior to any person becoming an Acquiring Person, the Shurgard
REIT Board may redeem the Rights in whole, but not in part, at the price of
$.0001 per Right, with adjustments for stock splits, stock dividends or other
similar transactions (the "Redemption Price"). The redemption of the Rights may
be made effective at such time, on such basis and with such conditions as the
Shurgard REIT Board in its sole discretion may establish. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Shurgard REIT Board without
the consent of the holders of the Rights, including an amendment to lower
certain 10% thresholds described above to not less than the greater of (i) the
sum of .001% and the largest percentage of the outstanding Shurgard Class A
Common Stock then known to the Shurgard REIT to be beneficially owned by any
person or group of affiliated persons and (ii) 9.8%, except that, from and after
such time as any person or group of affiliated or associated persons becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of the Shurgard REIT, including, without limitation, the right
to vote or to receive dividends.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Shurgard
REIT without conditioning the offer on substantially all the Rights being
acquired. The Rights will not interfere with any merger or other business
combination approved by the Shurgard REIT Board since the Shurgard REIT Board
may, at its option, at any time prior to any person becoming an Acquiring
Person, redeem all but not less than all the then-outstanding Rights at the
Redemption Price.
DESCRIPTION OF MANAGEMENT COMPANY CAPITAL STOCK
The following description is summarized from the provisions of the
Management Company's Articles of Incorporation.
The Management Company's authorized capital consists of 10,000,000 shares of
Management Company Common Stock. All shares of Management Company Common Stock
are entitled to participate equally in dividends. Each shareholder has one vote
for each share registered in such shareholder's name as of the applicable record
date for any matter presented to shareholders. All shares of Management Company
Common Stock rank equally on liquidation. Holders of shares of Management
Company Common Stock have no preemptive rights and are not entitled to cumulate
their votes in the election of directors.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE
SHURGARD REIT AND OF THE MANAGEMENT COMPANY
If the Merger is consummated, holders of shares of Management Company Common
Stock will become holders of shares of Shurgard Class A Common Stock and the
rights of the former Management Company shareholders will be governed by the
laws of the state of Delaware and by the Shurgard REIT's Certificate of
Incorporation and By-Laws. The rights of the Shurgard REIT shareholders under
the Certificate of Incorporation and By-Laws differ in certain respects from the
rights of the Management Company shareholders under the Management Company's
Articles of Incorporation and By-Laws. Certain differences between the rights of
the Shurgard REIT shareholders and the Management Company shareholders are
summarized below. This summary is qualified in its entirety by reference to the
full text of such documents. For information as to how such documents may be
obtained, see "AVAILABLE INFORMATION."
102
<PAGE>
GENERAL
Upon consummation of the Merger, the shareholders of the Management Company
will become shareholders of the Shurgard REIT. Accordingly, the rights of the
Management Company shareholders following the Merger will, subject to the
limitations set forth in the following paragraph, be governed by Delaware law,
as well as by the Shurgard REIT's Certificate of Incorporation and its By-Laws.
While it is not practical to discuss all changes in the rights of the
Management Company shareholders as a result of the application of Delaware law
in lieu of Washington law, the following is a summary of material differences.
As indicated in the following discussion, the DGCL contains certain provisions
applicable only to "registered corporations," which in essence are publicly held
corporations such as the Shurgard REIT that have a class of voting shares
registered under the Exchange Act.
CHANGES PRINCIPALLY ATTRIBUTABLE TO DIFFERENCES BETWEEN THE DGCL AND THE WBCA
AMENDMENT OF ARTICLES/CERTIFICATE OF INCORPORATION. The WBCA authorizes a
corporation's board of directors to make various changes of an administrative
nature to the corporation's articles of incorporation, including changes of
corporate name, changes to the number of outstanding shares in order to
effectuate a stock split or stock dividend in the corporation's own shares, and
changes to or elimination of provisions with respect to the corporation's
stock's par value. Other amendments to a corporation's articles of incorporation
must be recommended to the shareholders by the board of directors, unless the
board determines that because of a conflict of interest or other special
circumstances, it should make no recommendation, and must be approved by
two-thirds (if the corporation is not a public company) of all votes entitled to
be cast by each voting group that has a right to vote on the amendment. The
articles of incorporation of a corporation other than a public company may
provide for a lower percentage of shareholder approval (but not less than a
majority of the votes entitled to be cast). The Management Company's Articles of
Incorporation do not specify a different proportion. Under the DGCL, all
amendments to a corporation's certificate of incorporation require the approval
of shareholders holding a majority of the voting power of the corporation unless
a different proportion is specified in the certificate of incorporation. The
Shurgard REIT's Certificate of Incorporation does not specify a different
proportion.
PROVISIONS AFFECTING ACQUISITIONS AND BUSINESS COMBINATIONS. The WBCA
imposes restrictions on certain transactions between a corporation and certain
significant shareholders. First, under Section 23.17.020 of the WBCA, subject to
certain exceptions, a merger, share exchange, sale of assets other than in the
regular course of business, or dissolution involving an "Interested Shareholder"
(i.e., a shareholder owning beneficially 20% or more of the corporation's voting
securities) must be approved by the holders of two-thirds of the outstanding
voting securities, other than those of the Interested Shareholder, of each
voting group entitled to vote separately on the transaction. This restriction
does not apply if the consideration received as a result of the transaction by
noninterested shareholders is not less than the highest consideration paid by
the Interested Shareholder for shares of the corporation's stock during the
preceding two years, if the transaction is approved by a majority of directors
who are not affiliated with the Interested Shareholder or if the corporation has
fewer than 300 shareholders. A Washington corporation may, in its articles of
incorporation, exempt itself from coverage of this provision; the Management
Company has not done so.
Second, Chapter 23B.19 of the WBCA prohibits a "target corporation," with
certain exceptions, from engaging in certain "significant business transactions"
with an "Acquiring Person" who acquires 10% or more of the voting securities of
a target corporation for a period of five years after such acquisition, unless
the transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the date of the
acquisition. The prohibited transactions include, among others, merger or
consolidation with, disposition of assets to, or issuance or redemption of stock
to or from, the Acquiring Person, termination of 5% or more of the employees of
the target corporation as a result of the Acquiring Person's acquisition of 10%
or more of the shares of the corporation, or allowing the Acquiring Person to
receive any disproportionate benefit as a shareholder. Target corporations
include domestic corporations with their principal executive offices in
103
<PAGE>
Washington and either a majority of or over 1,000 of their employees resident in
Washington. Foreign corporations that meet additional requirements are also
subject to the statute. The Shurgard REIT does not currently employ, and will
not employ immediately following the Merger, that number of Washington residents
that would require compliance with this statute. A corporation may not "opt out"
of this statute. However, corporations such as the Management Company that do
not have a class of voting stock registered pursuant to Section 12 of the
Exchange Act are not subject to Chapter 23B.19.
Delaware has enacted a business combination statute that is contained in
Section 203 of the DGCL providing that any person who acquires 15% or more of a
corporation's voting stock (thereby becoming an "interested shareholder") may
not engage in certain "business combinations" with the target corporation for a
period of three years following the date the person became an interested
shareholder, unless (i) the corporation's board of directors has approved, prior
to that acquisition date, either the business combination or the transaction
that resulted in the person becoming an interested shareholder, (ii) upon
consummation of the transaction that resulted in the person becoming an
interested shareholder, that person owns at least 85% of the corporation's
voting stock outstanding at the time the transaction is commenced (excluding
shares owned by persons who are both directors and officers and shares owned by
employee stock plans in which participants do not have the right to determine
confidentially whether shares will be tendered in a tender or exchange offer),
or (iii) the business combination is approved by the board of directors and
authorized by the affirmative vote (at an annual or special meeting and not by
written consent) of at least 66 2/3% of the outstanding voting stock not owned
by the interested shareholder.
For purposes of determining whether a person is the "owner" of 15% or more
of a corporation's voting stock for purposes of Section 203, ownership is
defined broadly to include the right, directly or indirectly, to acquire the
stock or to control the voting or disposition of the stock. A "business
combination" is also defined broadly to include (i) mergers and sales or other
dispositions of 10% or more of the assets of a corporation with or to an
interested shareholder, (ii) certain transactions resulting in the issuance or
transfer to the interested shareholder of any stock of the corporation or its
subsidiaries, (iii) certain transactions that would result in increasing the
proportionate share of the stock of a corporation or its subsidiaries owned by
the interested shareholder, and (iv) receipt by the interested shareholder of
the benefit (except proportionately as a shareholder) of any loans, advances,
guarantees, pledges or other financial benefits.
These restrictions placed on interested shareholders by Section 203 do not
apply under certain circumstances, including, but not limited to, the following:
(i) if the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 or (ii) if the
corporation, by action of its shareholders, adopts an amendment to its by-laws
or certificate of incorporation expressly electing not to be governed by Section
203, provided that such an amendment is approved by the affirmative vote of not
less than a majority of the outstanding shares entitled to vote and that such an
amendment will not be effective until 12 months after its adoption and will not
apply to any business combination with a person who became an interested
shareholder at or prior to such adoption. The Shurgard REIT has expressly
elected in its original Certificate of Incorporation to take itself outside of
the coverage of Section 203.
MERGERS, ACQUISITIONS AND OTHER TRANSACTIONS. Under the WBCA, a merger,
consolidation, sale of substantially all of a corporation's assets other than in
the regular course of business, or dissolution of a public corporation must be
approved by the affirmative vote of a majority of directors when a quorum is
present, and by two-thirds of all votes entitled to be cast by each voting group
entitled to vote as a separate group, unless another proportion (but not less
than a majority of all votes entitled to be cast) is specified in the articles
of incorporation. The Management Company's Articles of Incorporation provide
that all corporate transactions may be approved by a majority of a quorum of the
outstanding shares entitled to vote; provided, however, the Management Company's
Articles of Incorporation do not expressly state that a merger may be approved
with less than a two-thirds vote of
104
<PAGE>
all votes entitled to be cast. Under the DGCL, a merger, consolidation, sale of
all or substantially all of a corporation's assets other than in the regular
course of business or dissolution of a corporation must be approved by a
majority of the outstanding shares entitled to vote.
ACTION WITHOUT A MEETING. Under the WBCA, shareholder action may be taken
without a meeting if written consents setting forth such action are signed by
all holders of outstanding shares entitled to vote thereon. Unless otherwise
provided in the certificate of incorporation, the DGCL authorizes shareholder
action without a meeting if consents are received from holders of a majority of
the outstanding shares entitled to vote. The Shurgard REIT's Certificate of
Incorporation, however, requires written consents signed by all shareholders
entitled to vote on the proposed subject matter.
CLASS VOTING. Under the WBCA, the articles of incorporation may authorize
one or more classes of shares that have special, conditional or limited voting
rights, including the right to vote on certain matters as a group. The articles
of incorporation may not limit the rights of holders of a class to vote as a
group with respect to certain amendments to the articles of incorporation and
certain mergers that adversely affect the rights of holders of that class. The
Management Company has one authorized class of stock. See "DESCRIPTION OF
MANAGEMENT COMPANY CAPITAL STOCK." The DGCL requires voting by separate classes
only with respect to amendments to the certificate of incorporation that
adversely affect the holders of those classes or that increase or decrease the
aggregate number of authorized shares or the par value of the shares of any of
those classes. The Shurgard REIT has four classes of stock. See "DESCRIPTION OF
SHURGARD REIT CAPITAL STOCK."
TRANSACTIONS WITH OFFICERS OR DIRECTORS. The WBCA sets forth a safe harbor
for transactions between a corporation and one or more of its directors. A
conflicting interest transaction may not be enjoined, set aside or give rise to
damages if: (i) it is approved by a majority of qualified directors; (ii) it is
approved by the affirmative vote of a majority of all qualified shares; or (iii)
at the time of commitment, the transaction was fair to the corporation. For
purposes of this provision, a "qualified director" is one who does not have (a)
a conflicting interest respecting the transaction or (b) a familial, financial,
professional or employment relationship with a second director, which
relationship would reasonably be expected to exert an influence on the first
director's judgment when voting on the transaction. "Qualified shares" are
defined generally as shares other than those beneficially owned, or the voting
of which is controlled, by a director who has a conflicting interest respecting
the transaction.
The DGCL provides that contracts or transactions between a corporation and
one or more of its officers or directors or an entity in which they have an
interest is not void or voidable solely because of such interest or the
participation of the director or officer in a meeting of the board or a
committee that authorizes the contract or transaction if: (i) the material facts
as to the relationship or interest and as to the contract or transaction are
disclosed or are known to the board or the committee, and the board or the
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of disinterested directors; (ii) the material
facts as to the relationship or interest and as to the contract or transaction
are disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by a vote of the
shareholders; or (iii) the contract or transaction is fair to the corporation as
of the time it is authorized, approved or ratified by the board of directors, a
committee thereof or the shareholders.
APPRAISAL OR DISSENTERS' RIGHTS. Under the WBCA, a shareholder is entitled
to dissent from and, upon perfection of his or her appraisal rights, to obtain
fair value of his or her shares in the event of certain corporate actions,
including certain mergers, consolidations, share exchanges, sales of
substantially all the assets of the corporation, and amendments to the
corporation's articles of incorporation that materially and adversely affect
shareholder rights.
Under the DGCL, appraisal rights are available only in connection with
certain mergers or consolidations, unless otherwise provided in the
corporation's certificate of incorporation. Even in the event of those mergers
or consolidations, unless the certificate of incorporation otherwise provides,
the DGCL does not provide appraisal rights if (i) the shares of the corporation
are listed on a national securities exchange, designated as a national market
system security on an interdealer quotation
105
<PAGE>
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 shareholders (as long as in the merger the shareholders
receive shares of the surviving corporation or any other corporation the shares
of which are listed on a national securities exchange, designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
shareholders) or (ii) the corporation is the surviving corporation and no vote
of its shareholders is required for the merger. Because the Shurgard REIT is
currently listed on the Nasdaq National Market and has over 2,000 shareholders
of record, shareholders currently would not have statutory appraisal rights
under the DGCL in such mergers.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under the WBCA, if authorized by
the articles of incorporation, a bylaw adopted or ratified by shareholders, or a
resolution adopted or ratified, before or after the event, by the shareholders,
a corporation has the power to indemnify a director or officer made a party to a
proceeding, or advance or reimburse expenses incurred in a proceeding, under any
circumstances, except that no such indemnification shall be allowed on account
of: (i) acts or omissions of a director or officer finally adjudged to be
intentional misconduct or a knowing violation of the law; (ii) conduct of a
director or officer finally adjudged to be an unlawful distribution; or (iii)
any transaction with respect to which it was finally adjudged that such director
or officer personally received a benefit in money, property or services to which
the director or officer was not legally entitled. Unless limited by the
corporation's articles of incorporation, Washington law requires indemnification
if the director or officer is wholly successful on the merits of the action or
otherwise. Any indemnification of a director in a derivative action must be
reported to the shareholders in writing. Written commentary by the drafters of
the WBCA, which has the status of legislative history, specifically indicates
that a corporation may indemnify its directors and officers for amounts paid in
settlement of derivative actions, provided that the director's or officer's
conduct does not fall within one of the categories set forth above. The
Management Company's Articles of Incorporation provide for the limitation of
director liability to the full extent permitted by the WBCA.
Under the DGCL, indemnification of directors and officers is authorized to
cover judgments, amounts paid in settlement, and expenses arising out of
nonderivative actions where the director or officer acted in good faith and in
or not opposed to the best interests of the corporation. Indemnification is
required to the extent of a director's or officer's successful defense.
Additionally, under the DGCL, a corporation may reimburse directors and officers
for expenses incurred in a derivative action. While the DGCL provides that these
indemnification provisions are not exclusive, which, in the Shurgard REIT's
opinion, indicates that a corporation may provide for broad indemnification in
its charter documents, including circumstances not specifically authorized under
the DGCL, there is some uncertainty as to the extent to which a corporation may
indemnify its directors and officers for judgments and amounts paid in
settlement of derivative actions. There are no definitive decisions and this
uncertainty exists because certain legal commentators have argued that such
indemnification would be circular and thus against public policy. Also, a
proposal to permit such indemnification was specifically rejected by the General
Corporation Law Section of the Delaware Bar Association. This uncertainty may
adversely affect the Shurgard REIT's ability to recruit and retain highly
qualified directors and officers in the future.
DIVIDENDS. Under the WBCA, a corporation may make a distribution in cash or
in property to its shareholders upon the authorization of its board of directors
unless, after giving effect to such distribution, (i) the corporation would be
unable to pay its debts as they become due in the usual course of business or
(ii) the corporation's total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights of
shareholders whose preferential rights are superior to those receiving the
distribution.
A Delaware corporation may pay dividends out of any surplus and, if it has
no surplus, out of any net profits for the fiscal year in which the dividend was
declared or for the preceding fiscal year (provided that such payment will not
reduce capital below the amount of capital represented by all classes of shares
having a preference upon the distribution of assets).
106
<PAGE>
MANAGEMENT OF THE SHURGARD REIT
It is currently anticipated that the following persons will serve as the
directors and executive officers of the Shurgard REIT following the Closing. As
a result of the Merger, Charles K. Barbo will be appointed as the Shurgard
REIT's Chairman of the Board, President and Chief Executive Officer; Harrell L.
Beck will be appointed as Senior Vice President, Chief Financial Officer and
Treasurer; and Kristin H. Stred will be appointed as Senior Vice President,
General Counsel and Secretary. At the Effective Time, all the officers and other
employees of the Management Company will become direct employees of the Shurgard
REIT.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE SHURGARD REIT FOLLOWING THE MERGER
- ----------------------- --- ------------------------------------------------------------
<S> <C> <C>
Charles K. Barbo 53 Chairman of the Board, President and Chief Executive Officer
Harrell L. Beck 37 Director, Senior Vice President, Chief Financial Officer and
Treasurer
Dan Kourkoumelis (1) 43 Director
Donald W. Lusk (1)(2) 66 Director
Wendell J. Smith (1)(2) 61 Director
Michael Rowe 37 Executive Vice President
David K. Grant 41 Executive Vice President
Kristin H. Stred 35 Senior Vice President, Secretary and General Counsel
<FN>
- ------------------------
(1) Member of the Compensation Committee of the Shurgard REIT Board.
(2) Member of the Audit Committee of the Shurgard REIT Board.
</TABLE>
CHARLES K. BARBO has been involved as a principal in the real estate
investment industry since 1969. Mr. Barbo is one of the co-founders of the
Management Company, which was organized in 1972 to provide property management
services for self-storage facilities and other real estate and commercial
ventures. He currently serves as the Chairman of the Board and President of the
Management Company. Mr. Barbo is a graduate of the Owner/President Management
Program of Harvard Business School, has a Bachelor of Arts degree in history
from the University of Washington, and is a licensed real estate broker and a
licensed securities principal and salesman. He is an alumnus of the Young
Presidents Organization.
HARRELL L. BECK will serve as Senior Vice President, Treasurer and Chief
Financial Officer of the Shurgard REIT following the Merger. Prior to the
Merger, Mr. Beck also served as President of the Shurgard REIT. He is a member
of the Shurgard REIT Board. Mr. Beck is also the Treasurer and Chief Financial
Officer of the Management Company. He joined the Management Company in April
1986 as the Eastern Regional Vice President and, in 1990, became its Chief
Financial Officer and, in 1992, its Treasurer. His responsibilities include
supervising all accounting and overseeing the financial and banking
relationships for the Shurgard REIT and the Management Company. Mr. Beck was
previously a manager with Touche Ross & Co., where he was employed for
approximately six years providing services primarily to clients in the real
estate and aerospace industries. His clients included the Management Company and
the Partnerships that were consolidated to form the Shurgard REIT. Mr. Beck has
a Bachelor of Arts degree in Business Administration from Washington State
University and is a member of the American Institute of Certified Public
Accountants and the Washington Society of Certified Public Accountants.
DAN KOURKOUMELIS is the President, Chief Operating Officer and a director of
Quality Food Centers, Inc. ("QFC"), a publicly held corporation that operates
the largest independent supermarket chain in the Seattle area. Mr. Kourkoumelis
joined QFC in 1967 and has held a variety of positions
107
<PAGE>
since then. He served as Executive Vice President from 1983 to 1987, when he
also became Chief Operating Officer, and became President in 1989 and a director
in 1991. Mr. Kourkoumelis has a Bachelor of Arts degree in Marketing from the
University of Washington.
DONALD W. LUSK is the President of Lusk Consulting Group, which is engaged
in general management consulting, as well as the formation and delivery of
management development programs in Western Canada. From 1974 to 1991, Mr. Lusk
was Regional Managing Partner of Management Action Programs, Inc. in the Pacific
Northwest. Mr. Lusk has a Bachelor of Arts degree from Pomona College. He
currently serves as director of Robert E. Bayley Construction Company and G.T.
Development Corporation. He has previously served as a director of Management
Action Programs, Inc., The Bekins Company, California Pacific National Bank,
I.C.X. Corporation, Laguna Manufacturing Company, Ormand Industries and Pacific
United Services Corporation and was Chairman of the Board of the School of
Business and Economics Advisory Board of Seattle Pacific University.
WENDELL J. SMITH retired in 1991 from the State of California Public
Employees Retirement System ("Calpers") after 27 years of employment, the last
21 in charge of all real estate equities and mortgage acquisitions for Calpers.
During those 21 years, Calpers invested over $8,000,000,000 in real estate and
mortgages. In 1991, Mr. Smith established W.J.S. & Associates, which provides
advisory and consulting services for pension funds and pension fund advisors.
MICHAEL ROWE is currently an Executive Vice President and the Director of
Storage Operations of the Shurgard REIT. He is also currently the Executive Vice
President and Director of Storage Operations of the Management Company. Prior to
his employment with the Management Company, he was employed with Touche Ross &
Co., where he participated in independent audits of major real estate
syndication, development and management companies in the Pacific Northwest. His
clients included the Management Company and the Partnerships that were
consolidated to form the Shurgard REIT. He became Controller of the Management
Company in 1982 and Vice President and Treasurer in 1983. In 1987, Mr. Rowe was
named Director of Operations of the Management Company. He also was the first
Regional Vice President for the Management Company's Southwest Region. Mr.
Rowe's responsibilities include supervising the Management Company's property
management services. Mr. Rowe has a Bachelor of Arts degree in Business
Administration from Washington State University.
DAVID K. GRANT is currently an Executive Vice President and the Director of
Real Estate Investment of the Shurgard REIT. Mr. Grant joined the Management
Company in November 1985 as Director of Real Estate Investment and continues to
serve in that capacity. He is also an Executive Vice President of the Management
Company. Mr. Grant is responsible for overseeing the acquisition, development
and disposition of real estate investments for the Shurgard REIT and the
Management Company. He is a licensed securities principal and salesperson. Mr.
Grant was previously a manager with Touche Ross & Co., where he was employed for
approximately 10 years providing financial consulting, accounting and auditing
services primarily to clients in the real estate, construction and engineering
industries. His clients included the Management Company and the Partnerships
that were consolidated to form the Shurgard REIT. Mr. Grant has a Bachelor of
Arts degree in Business Administration and a Bachelor of Science degree in
Accounting, both from Washington State University.
KRISTIN H. STRED serves as Secretary and General Counsel of the Shurgard
REIT. She will also serve as Senior Vice President of the Shurgard REIT
following the Merger. Ms. Stred joined the Management Company in July 1992 as
Secretary and General Counsel. She was previously an attorney with The Boeing
Company from October 1991 to July 1992 and Assistant General Counsel with King
Broadcasting Company from July 1987 to September 1991. Ms. Stred has a Bachelor
of Arts degree with honors in general studies from Harvard University and a J.D.
from Harvard Law School. She is a member of the Washington State Bar
Association, is a former president of Washington Women Lawyers and is a member
of the Executive Committee of the Corporate Counsel Section of the Washington
State Bar Association.
108
<PAGE>
COMMITTEES OF THE SHURGARD REIT BOARD
AUDIT COMMITTEE. The Audit Committee of the Shurgard REIT Board recommends
to the Board the independent public accountants to be selected to audit the
Shurgard REIT's annual financial statements and approve any special assignments
given to such accountants. The Audit Committee also reviews the planned scope of
the annual audit and the independent accountants' letter of comments and
management's responses thereto, any major accounting changes made or
contemplated and the effectiveness and efficiency of the Shurgard REIT's
internal accounting staff. The Audit Committee is comprised solely of
independent directors.
COMPENSATION COMMITTEE. The Compensation Committee of the Shurgard REIT
Board establishes remuneration levels for officers of the Shurgard REIT, reviews
management organization and development, reviews significant employee benefits
programs and establishes and administers executive compensation programs,
including bonus plans, stock option and other equity-based programs, deferred
compensation plans and any other cash or stock incentive programs.
The Shurgard REIT Board may from time to time establish certain other
committees to facilitate the management of the Shurgard REIT.
COMPENSATION TO THE SHURGARD REIT'S DIRECTORS AND OFFICERS
Directors who are not officers of the Shurgard REIT receive an annual fee of
$12,000 for serving on the Shurgard REIT Board. Such directors also receive fees
of $1,000 for attending each Board meeting and $500 for attending each Board
committee meeting (in person or by telephone). In addition, the Shurgard REIT
reimburses such directors for travel expenses incurred in connection with their
activities on behalf of the Shurgard REIT. Each member of the Shurgard REIT
Board who is not an employee or officer of the Shurgard REIT receives an annual
stock option grant to purchase 400 shares of Shurgard Class A Common Stock
pursuant to the Stock Option Plan for Nonemployee Directors. The members of the
Special Committee each received $6,000 in fees for their services on the Special
Committee.
Prior to the consummation of the Merger, no officer of the Shurgard REIT
received cash compensation for serving on the Shurgard REIT Board or on any of
its committees. The officers of the Shurgard REIT received no remuneration for
their services to the Shurgard REIT but were compensated by the Management
Company in their capacities as officers and employees of the Management Company,
except to the extent that certain stock options may be granted to such officers
by the Shurgard REIT Board.
109
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation for services rendered during
the fiscal years ended December 31, 1994 and 1993, for Charles K. Barbo, who
will be appointed Chairman of the Board, President and Chief Executive Officer
of the Shurgard REIT in connection with the Merger, and for the four other most
highly compensated executive officers of the Shurgard REIT following the Merger.
Although certain of the individuals named below served as directors or officers
of the Shurgard REIT prior to the Merger, they did not receive any cash
compensation for such services from the Shurgard REIT but instead were
compensated by the Management Company. Accordingly, all dollar amounts shown
were paid by the Management Company and, except as indicated otherwise, all
options shown are options to purchase shares of Management Company Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------ SHARES
SALARY UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($)(1) OPTIONS (#) COMPENSATION ($)(2)
- ----------------------------------- ---- --------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
Charles K. Barbo................... 1994 $155,000 $30,000 -- $ 200
Chairman, President and Chief 1993 $150,000 $25,000 -- $2,316
Executive Officer
Michael Rowe....................... 1994 $103,000 $25,000 2,000(3) $5,888
Executive Vice President and 1993 $100,000 $30,340 10,000 $7,844
Director of Storage Operations
David K. Grant..................... 1994 $103,000 $24,000 2,000(3) $5,888
Executive Vice President and 1993 $100,000 $15,000 10,000 $7,844
Director of Real Estate Investment
Harrell L. Beck.................... 1994 $ 80,000 $24,000 2,000(3) $ 200
Director, Senior Vice President, 1993 $ 75,000 $15,000 10,000 $ 200
Chief Financial Officer and
Treasurer
Kristin H. Stred................... 1994 $ 80,000 $24,000 2,000(3) $ 200
Senior Vice President, General 1993 $ 75,000 $15,000 7,500 $ 200
Counsel and Secretary
<FN>
- ------------------------
(1) Includes bonus awards earned pursuant to the terms of discretionary bonus,
incentive compensation and profit-sharing arrangements.
(2) For the year ended December 31, 1994, includes employer matching
contributions made by the Management Company under its Employee Retirement
Savings Plan of $200 per person and, with respect to each of Messrs. Rowe
and Grant, $5,688 relating to interests in Management Company cash
distributions from investments in certain Partnerships.
(3) Represents options to purchase shares of Shurgard Class A Common Stock
granted by the Shurgard REIT.
</TABLE>
110
<PAGE>
OPTION GRANTS
The following table sets forth certain information regarding options to
purchase shares of Shurgard Class A Common Stock granted during the fiscal year
ended December 31, 1994, to the individuals for whom compensation is reported in
this Proxy Statement/Prospectus. Such individuals were not granted any options
to purchase shares of Management Company Common Stock during the fiscal year
ended December 31, 1994.
OPTION GRANTS IN FISCAL 1994
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- ---------------------------------------------------------------------------------------- ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SHARES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM (3)
OPTIONS EMPLOYEES IN ($/ EXPIRATION ----------------
NAME GRANTED (#)(1) FISCAL YEAR (2) SHARE) DATE 5%($) 10%($)
- ------------------------------ -------------- --------------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Charles K. Barbo.............. -- -- -- -- -- --
Michael Rowe.................. 2,000 25% $ 18.90 3/17/04 $23,772 $60,243
David K. Grant................ 2,000 25% $ 18.90 3/17/04 $23,772 $60,243
Harrell L. Beck............... 2,000 25% $ 18.90 3/17/04 $23,772 $60,243
Kristin H. Stred.............. 2,000 25% $ 18.90 3/17/04 $23,772 $60,243
<FN>
- ------------------------
(1) Options are granted at the fair market value on the date of grant, which
was the per share value of the assets of the 17 Partnerships included in
the Consolidation, less liabilities. Each option vests in annual
installments of 20%, commencing on the first anniversary of the date of
grant.
(2) The Shurgard REIT did not have any employees during the fiscal year ended
December 31, 1994. As shown in this table, option grants were made to
officers of the Shurgard REIT.
(3) The dollar amounts under these columns are the result of calculations at
assumed rates of appreciation of 5% and 10% and are not intended to
forecast future appreciation. No value will be realized if the stock price
does not exceed the exercise price of the options.
</TABLE>
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth certain information as of December 31, 1994,
regarding options to purchase shares of Management Company Common Stock held by
the individuals for whom compensation is reported in this Proxy
Statement/Prospectus. None of such individuals exercised any options during the
fiscal year ended December 31, 1994.
AGGREGATED FISCAL 1994 YEAR-END VALUES
FOR MANAGEMENT COMPANY OPTIONS
<TABLE>
<CAPTION>
TOTAL NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END (#) AT FISCAL YEAR-END ($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles K. Barbo.............. -- -- -- --
Michael Rowe.................. 5,333 18,667 $25,904 $74,796
David K. Grant................ 2,666 17,334 $12,681 $68,179
Harrell L. Beck............... 5,333 17,667 $25,904 $70,956
Kristin H. Stred.............. -- 7,500 -- $28,875
<FN>
- ------------------------
(1) The value was calculated by multiplying the number of shares of Management
Company Common Stock issuable upon exercise of the options by the number of
shares of Shurgard Class A Common Stock each share of Management Company
Common Stock will be converted into in the Merger
</TABLE>
111
<PAGE>
<TABLE>
<S> <C>
(assuming 1,400,000 shares of Shurgard Class A Common Stock are issued at
the Closing), and multiplying the result by the closing price of the
Shurgard Class A Common Stock on December 31, 1994, and deducting the
aggregate exercise price of the options from the result.
</TABLE>
The following table sets forth certain information as of December 31, 1994,
regarding options to purchase shares of Shurgard Class A Common Stock held by
the individuals for whom compensation is reported in this Proxy
Statement/Prospectus. None of such individuals exercised any options during the
fiscal year ended December 31, 1994.
AGGREGATED FISCAL 1994 YEAR-END VALUES
FOR SHURGARD REIT OPTIONS
<TABLE>
<CAPTION>
TOTAL NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END (#) AT FISCAL YEAR-END ($)(1)
-------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles K. Barbo.......................................... -- -- -- --
Michael Rowe.............................................. -- 2,000 -- $3,700
David K. Grant............................................ -- 2,000 -- $3,700
Harrell L. Beck........................................... -- 2,000 -- $3,700
Kristin H. Stred.......................................... -- 2,000 -- $3,700
<FN>
- ------------------------
(1) This amount is the aggregate number of outstanding options multiplied by
the difference between the closing price of Shurgard Class A Common Stock
as of December 31, 1994, minus the exercise price of such options.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 1, 1994, the Shurgard REIT made a $1,981,000 interest-free loan to
Mr. Barbo to enable him to make certain capital contributions that were required
in connection with the Consolidation. Mr. Barbo's Shurgard Class B Common Stock
has been pledged as collateral for the loan. Upon repayment of the loan, a
percentage of the Shurgard Class B Common Stock will be released from the pledge
equal to the percentage of the loan principal being repaid, and Mr. Barbo will
then have the option to convert his Shurgard Class B Common Stock, on a
share-for-share basis, into Shurgard Class A Common Stock. The terms of this
loan to Mr. Barbo will not be affected by the Merger.
112
<PAGE>
PRINCIPAL SHURGARD REIT SHAREHOLDERS
The following table sets forth, as of December 31, 1994, certain information
with respect to the beneficial ownership of shares of Shurgard REIT Common Stock
by (i) each shareholder who is the beneficial owner of more than 5% of the
shares of Shurgard Class B Common Stock, (ii) each director and director nominee
of the Shurgard REIT, (iii) each of the Shurgard REIT's executive officers for
whom compensation is reported in this Proxy Statement/Prospectus, and (iv) all
directors and executive officers of the Shurgard REIT as a group. Except as
otherwise noted, the Shurgard REIT believes that the beneficial owners of the
shares of Shurgard REIT Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares. As of December 31, 1994, no shareholder beneficially owned more
than 5% of the shares of Shurgard Class A Common Stock.
<TABLE>
<CAPTION>
SHARES OF SHURGARD REIT SHARES OF SHURGARD REIT
COMMON STOCK BENEFICIALLY SHARES OF SHURGARD COMMON STOCK BENEFICIALLY
OWNED PRIOR TO MERGER (1) CLASS A COMMON OWNED AFTER MERGER (1)
---------------------------- STOCK TO BE ISSUED -----------------------------
TITLE OF PERCENT IN CONNECTION TITLE OF PERCENT
NAME AND ADDRESS CLASS (3) NUMBER OF CLASS WITH MERGER (1)(2) CLASS (3) NUMBER OF CLASS
- --------------------------- ---------- ------ -------- ------------------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles K. Barbo........... Class A 34,137 * 620,187 Class A 654,324 3.6%
1201 Third Avenue, Ste 2200 Class B 76,529 49.5% Class B 76,529 49.5%
Seattle, WA 98101
Arthur W. Buerk............ Class A 6,692 * 375,685 Class A 382,377 2.0%
3831 49th N.E. Class B 76,529 49.5% Class B 76,529 49.5%
Seattle, WA 98105
David K. Grant............. Class A 3,647 * 47,069 Class A 50,716 *
Michael Rowe............... Class A 1,322 * 65,269 Class A 66,591 *
Dan Kourkoumelis........... -- -- -- -- --
Donald W. Lusk............. -- -- -- -- --
Wendell J. Smith........... -- -- -- -- --
Harrell L. Beck............ Class A 159 * 13,815 Class A 13,974 *
Kristin H. Stred........... Class A 300 * 2,697 Class A 2,997 *
All directors and executive Class A 39,565 * 749,037 Class A 788,602 4.3%
officers as a group (8 Class B 76,529 49.5% Class B 76,529 49.5%
persons)..................
<FN>
- ------------------------
* Less than one percent.
(1) The shares of Shurgard REIT Common Stock reported in this table as
beneficially owned prior to the Merger by the named persons do not include
282,572 shares of Shurgard Class A Common Stock owned by the Management
Company, which shares increase the Share Consideration and are included in
shares of Shurgard Class A Common Stock to be issued in connection with the
Merger and in the number of shares beneficially owned after the Merger. See
"THE MERGER -- Adjustments to Share Consideration."
(2) Assumes 1,400,000 shares of Shurgard Class A Common Stock are issued at the
Closing. Does not include any Contingent Shares that may subsequently be
issued to Management Company shareholders pursuant to the Merger Agreement.
(3) See "DESCRIPTION OF SHURGARD REIT CAPITAL STOCK -- Common Stock" for a
description of the Shurgard Class A Common Stock and the Shurgard Class B
Common Stock.
</TABLE>
113
<PAGE>
PRINCIPAL MANAGEMENT COMPANY SHAREHOLDERS
The following table sets forth as of December 31, 1994 certain information
with respect to the beneficial ownership of shares of Management Company Common
Stock and shares of Shurgard REIT Common Stock by (i) each person known by the
Management Company to beneficially own more than 5% of the shares of Management
Company Common Stock, (ii) each director of the Management Company, (iii) the
Management Company's chief executive officer and each other executive officer
for whom compensation is reported in this Proxy Statement/Prospectus, and (iv)
all directors and executive officers of the Management Company as a group.
Except as otherwise noted, the Management Company believes that the beneficial
owners of shares of Management Company Common Stock listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares. Except as otherwise noted, all shares of Shurgard REIT
Common Stock included in the following table are shares of Shurgard Class A
Common Stock.
<TABLE>
<CAPTION>
SHARES OF
SHURGARD REIT
SHARES OF MANAGEMENT SHARES OF SHARES OF COMMON STOCK
COMPANY COMMON STOCK SHURGARD REIT SHURGARD REIT BENEFICIALLY
BENEFICIALLY OWNED COMMON STOCK COMMON STOCK OWNED AFTER
PRIOR TO MERGER (1) BENEFICIALLY TO BE ISSUED IN MERGER (2)
----------------------- OWNED PRIOR CONNECTION ------------------
NAME AND ADDRESS NUMBER PERCENT TO MERGER (2) WITH MERGER (2)(3) NUMBER PERCENT
- ----------------------------- ------------- ------- ------------- ------------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Charles K. Barbo............. 1,724,600(4) 36.9% 110,666(5) 620,187 730,853 4.0%
1201 Third Avenue, Suite 2200
Seattle, WA 98101
Arthur W. Buerk.............. 1,044,696 22.3 83,221(6) 375,685 458,906 2.5
3831 49th N.E.
Seattle, WA 98105
Donald B. Daniels............ 538,124 11.5 10,589 193,516 204,105 *
1601 Sylvester St. S.W.
P.O. Box 7046
Olympia, WA 98501
Ronald C. Knutzen (7)........ 297,399 6.4 -- 106,948 106,948 *
1462 Allen West Road
Bow, Washington
Michael Rowe................. 181,498(8) 3.9 1,322 65,269 66,591 *
David K. Grant............... 130,887(9) 2.8 3,647 47,009 50,716 *
Harrell L. Beck.............. 38,416(10) * 159 13,815 13,974 *
Kristin H. Stred............. 7,500(11) * 300 2,697 2,997 *
All directors and executive
officers as a group
(7 persons)................. 3,665,721 78.4 209,904 1,318,237 1,528,141 8.3
<FN>
- ------------------------
* Less than one percent.
(1) Does not include allocation of 175,000 shares of Management Company Common
Stock that has been reserved for distribution as a stock bonus to employees
of the Management Company prior to the Closing. None of such shares will be
issued to Messrs. Barbo, Buerk or Daniels. Includes shares of Management
Company Common Stock subject to issuance upon the exercise of outstanding
stock options, all of which are expected to be exercised prior to the
Closing.
(2) The shares of Shurgard REIT Common Stock reported in this table as
beneficially owned by the named persons prior to the Merger do not include
282,572 shares of Shurgard Class A Common Stock owned by the Management
Company, which shares increase the Share Consideration and
</TABLE>
114
<PAGE>
<TABLE>
<S> <C>
are included in shares of Shurgard Class A Common Stock to be issued in
connection with the Merger and in the number of shares beneficially owned
after the Merger. See "THE MERGER -- Adjustments to Share Consideration."
(3) Assumes 1,400,000 shares of Shurgard Class A Common Stock are issued at the
Closing. Does not include any Contingent Shares that may subsequently be
issued to Management Company shareholders pursuant to the Merger Agreement.
(4) Includes 8,007 shares of Management Company Common Stock held for Mr.
Barbo's individual account under the Management Company's Employee
Retirement Savings Plan.
(5) Shares of Shurgard REIT Common Stock reported as beneficially owned by Mr.
Barbo prior to and after the Merger include 76,529 shares of Shurgard Class
B Common Stock.
(6) Shares of Shurgard REIT Common Stock reported as beneficially owned by Mr.
Buerk prior to and after the Merger include 76,529 shares of Shurgard Class
B Common Stock.
(7) Mr. Knutzen holds his shares as trustee for the Charles K. and Linda K.
Barbo Trust, a trust created for the benefit of Mr. Barbo's three children.
Mr. Knutzen has sole dispositive and voting power over the shares of
Management Company Common Stock held in the trust.
(8) Includes 24,000 shares of Management Company Common Stock issuable upon the
exercise of 10,000 vested and 14,000 unvested options. Vesting of such
options will be accelerated in connection with the Merger. In addition,
includes 7,498 shares of Management Company Common Stock held for Mr.
Rowe's individual account under the Management Company's Employee
Retirement Savings Plan.
(9) Includes 20,000 shares of Management Company Common Stock issuable upon
exercise of 6,000 vested and 14,000 unvested options. Vesting of such
options will be accelerated in connection with the Merger. In addition,
includes 5,887 shares of Management Company Common Stock held for Mr.
Grant's individual account under the Management Company's Employee
Retirement Savings Plan.
(10) Includes 23,000 shares of Management Company Common Stock issuable upon the
exercise of 9,667 vested and 13,333 unvested options. Vesting of such
options will be accelerated in connection with the Merger. In addition,
includes 5,416 shares of Management Company Common Stock held for Mr.
Beck's individual account under the Management Company's Employee
Retirement Savings Plan.
(11) Includes 7,500 shares of Management Company Common Stock issuable upon the
exercise of unvested options. Vesting of such options will be accelerated
in connection with the Merger.
</TABLE>
LEGAL OPINION
The legality of the shares of Shurgard Class A Common Stock to be issued in
connection with the Merger is being passed upon for the Shurgard REIT by Perkins
Coie, Seattle, Washington.
TAX OPINION
Certain of the tax consequences of the Merger to the Shurgard REIT, the
Management Company and the Management Company shareholders are being passed upon
by Perkins Coie, counsel to the Shurgard REIT. See "FEDERAL INCOME TAX
CONSEQUENCES -- Tax Treatment of the Management Company and the Shurgard REIT in
the Merger."
EXPERTS
The financial statements of Shurgard Storage Centers, Inc. as of December
31, 1993 and for the period then ended, the financial statements of the
Management Company of Shurgard Incorporated as of December 31, 1993 and for the
year then ended, and the combined financial statements of the 17 partnerships as
of December 31, 1993 and 1992 and for each of the three years in the period
ended December 31, 1993 included in this Proxy Statement/Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets at December 31, 1993 and September 30,
1994................................................................... F-3
Consolidated Statements of Income for the period from July 23, 1993
(inception) through December 31, 1993 and the nine months ended
September 30, 1994..................................................... F-4
Consolidated Statements of Shareholders' Equity for the period from July
23, 1993 (inception) through December 31, 1993 and the nine months
ended
September 30, 1994..................................................... F-5
Consolidated Statements of Cash Flows for the period from July 23, 1993
(inception) through December 31, 1993 and the nine months
ended September 30, 1994............................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Pro Forma Consolidated Statements of Income for the nine months ended
September 30, 1993 and 1994............................................ F-13
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
Independent Auditors' Report............................................ F-14
Statements of Assets and Liabilities at December 31, 1992 and 1993 and
September 30, 1994..................................................... F-15
Statements of Revenues, Expenses and Changes in Management Company
Equity for the years ended December 31, 1991, 1992 and 1993 and the
nine months ended September 30, 1994................................... F-16
Statements of Cash Flows for the years ended December 31, 1991, 1992 and
1993 and the nine months ended September 30, 1994...................... F-17
Notes to Financial Statements........................................... F-18
COMBINED PREDECESSOR PARTNERSHIPS
Independent Auditors' Report............................................ F-23
Combined Balance Sheets at December 31, 1992 and 1993 and March 1,
1994................................................................... F-24
Combined Statements of Earnings for the years ended December 31, 1991,
1992 and 1993 and the period ended March 1, 1994....................... F-25
Combined Statements of Partners' Equity (Deficit)....................... F-26
Combined Statements of Cash Flows for the years ended December 31, 1991,
1992 and 1993 and the period ended March 1, 1994....................... F-27
Notes to Combined Financial Statements.................................. F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Directors and Shareholders
Shurgard Storage Centers, Inc.
Seattle, Washington
We have audited the accompanying balance sheet of Shurgard Storage Centers,
Inc. (the "Company") as of December 31, 1993, and the related statement of
earnings, shareholders' equity and cash flows for the period from July 23, 1993
(inception) to December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shurgard Storage Centers,
Inc. as of December 31, 1993 and the results of its operations and its cash
flows for the period from July 23, 1993 to December 31, 1993 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
December 16, 1994
F-2
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(UNAUDITED)
<S> <C> <C>
Storage centers:
Land........................................... $-- $ 87,908
Buildings and equipment, net................... 363,891
------ -------------
451,799
Cash and cash equivalents........................ 1 15,982
Restricted cash.................................. 2,717
Investment in joint ventures..................... 3,050
Other assets..................................... 11,226
------ -------------
Total assets................................. $ 1 $484,774
------ -------------
------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities........... $ 1 $ 10,539
Line of credit................................... 30,000
Notes payable.................................... 125,121
------ -------------
Total liabilities............................ 1 165,660
Commitments (Note E)
Shareholders' equity:
Class A common stock, $0.001 par value;
120,000,000 shares authorized; 16,829,283 and
5 shares issued and outstanding,
respectively.................................. 317,434
Class B convertible common stock, $0.001 par
value; 500,000 shares authorized; 154,604
shares issued and outstanding at September 30,
1994; net of loans to shareholders of
$4,002........................................ (1,086)
Retained earnings................................ 2,766
------ -------------
Total shareholders' equity................... 319,114
------ -------------
Total liabilities and shareholders' equity... $ 1 $484,774
------ -------------
------ -------------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23,
1993
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenue
Rental revenue................................. $-- $45,701
Income from joint ventures..................... 109
Interest income................................ 473
------ -------------
Total revenue.............................. 46,283
Expenses
Operating expense.............................. 10,567
Management fees................................ 2,739
Depreciation and amortization.................. 7,594
Real estate taxes.............................. 4,083
General and administrative..................... 1,517
Interest....................................... 5,814
Other.......................................... 172
------ -------------
Total expenses............................. -- 32,486
------ -------------
Income before extraordinary item................. 13,797
Extraordinary item -- loss on retirement of
debt............................................ (1,180)
------ -------------
Net income....................................... $-- $12,617
------ -------------
------ -------------
Net income per share:
Income before extraordinary item............... $-- $0.81
Extraordinary item -- loss on retirement of
debt.......................................... (0.07)
------------
Net income..................................... $ -- $0.74
------------
------------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK LOANS TO
-------------------- --------------- CLASS B RETAINED
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS EARNINGS TOTAL
---------- -------- ------- ------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 23, 1993 (inception)
and December 31, 1993.............. 5 $ -- -- $ -- $-- $ -- $ --
Issuance of common stock............ 16,829,278 317,434 154,604 2,916 (4,002) 316,348
Net income.......................... 12,617 12,617
Dividends........................... (9,851) (9,851)
---------- -------- ------- ------ ------------ -------- --------
Balance, September 30, 1994
(unaudited)........................ 16,829,283 $317,434 154,604 $2,916 $(4,002) $ 2,766 $319,114
---------- -------- ------- ------ ------------ -------- --------
---------- -------- ------- ------ ------------ -------- --------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1993
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------- --------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................... $ -- $ 12,617
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization.............. 7,594
Extraordinary loss on retirement of debt... 1,180
Earnings in excess of distributions from
joint venture............................. (29)
Changes in operating accounts:
Restricted cash.......................... (2,717)
Other assets............................. (474)
Accounts payable and other liabilities... 1 874
------ --------------
Net cash provided by operating
activities............................ 1 19,045
------ --------------
INVESTING ACTIVITIES
Investment in joint venture.................. (600)
Acquisition of and improvements to storage
centers..................................... (100,875)
------ --------------
Net cash used in investing
activities............................ (101,475)
------ --------------
FINANCING ACTIVITIES
Dividends paid............................... (9,851)
Proceeds from line of credit................. 30,000
Proceeds from notes payable.................. 227,180
Payment of financing costs................... (8,088)
Payment of assumed consolidation
liabilities................................. (11,662)
Principal payments on notes payable.......... (129,168)
------ --------------
Net cash provided by financing
activities............................ 98,411
------ --------------
Increase in cash and short-term investments.... 1 15,981
Cash and cash equivalents at beginning of
period........................................ 1
------ --------------
Cash and cash equivalents at end of period..... $ 1 $ 15,982
------ --------------
------ --------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest..... $ -- $ 5,631
------ --------------
------ --------------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JULY 23, 1993 (INCEPTION) TO DECEMBER 31, 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE A -- ORGANIZATION
Shurgard Storage Centers, Inc. (the "Company") was organized under the laws
of the state of Delaware on July 23, 1993, to serve as a vehicle for investments
in, and ownership of, a professionally managed real estate portfolio consisting
primarily of self-service storage properties that provide month-to-month leases
for business and personal use.
On March 1, 1994, the Company completed the acquisition of 17 publicly held
limited partnerships (the "Partnerships") administered by Shurgard Incorporated
("Shurgard") as a means for assembling an initial portfolio of real estate
investments (Note E).
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company, SSC Property Holdings, Inc., SSC Acquisitions, Inc. and
Capitol Hill Partners. SSC Property Holdings, Inc. was established as a wholly
owned subsidiary to hold all storage centers that secure the note payable to a
financial services company (Note G). SSC Acquisitions, Inc. was established as a
wholly owned subsidiary to hold all storage centers that will secure the line of
credit with the same financial service company (Note F). The Company holds a 90%
ownership interest in Capitol Hill Partners, a joint venture with an
unaffiliated party, which joint venture owns one storage center. All
intercompany balances and transactions have been eliminated upon consolidation.
Prior to February 1994, the Company had no subsidiaries; therefore, the December
31, 1993 financial statements are not consolidated.
The consolidated interim financial statements included in this report are
unaudited. In the opinion of the Company, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consisted only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. Operating activity began March 1, 1994;
the Company was inactive prior to that date.
STORAGE CENTERS: Storage centers are recorded at cost. Depreciation on
buildings and equipment is recorded on a straight-line basis over their
estimated useful lives, which range from three to 30 years.
INVESTMENT IN JOINT VENTURES: The Company consolidates the accounts of
those joint ventures in which the Company has effective control. Minority
interest of $477,000 is included in other liabilities at September 30, 1994. All
other investments in joint ventures or participating mortgages are accounted for
on the equity method. Investments accounted for on the equity method include a
67% interest in Shurgard-Freeman Medical Center Joint Venture, a 50% interest in
Shurgard Freeman Hermitage Joint Venture and two participating mortgages (Note
E).
CASH EQUIVALENTS: Cash equivalents consist of money market instruments and
securities with original maturities of 90 days or less.
FINANCING COSTS: Financing costs are included in other assets and are
amortized on the effective interest method over the life of the related debt.
FEDERAL INCOME TAXES: The Company intends to qualify as a real estate
investment trust ("REIT") as defined in Section 856 of the Internal Revenue Code
of 1986, as amended. As a REIT, the Company will not be subject to federal
income taxes provided that it distributes annually at least 95% of its taxable
income and meets certain other requirements. As a result, no provision for
federal income taxes has been made in the Company's consolidated financial
statements.
F-7
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JULY 23, 1993 (INCEPTION) TO DECEMBER 31, 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION: Revenue is recognized when earned under accrual
accounting principles.
NET INCOME PER SHARE: Net income per share is calculated based on the
weighted average shares outstanding during the periods presented. No per share
data for 1993 has been included as such is de minimis.
FINANCIAL INSTRUMENTS: The carrying values reflected in the balance sheet
at September 30, 1994, reasonably approximate the fair value of cash and cash
equivalents, other assets, and notes payable. The Company estimates that the
fair value of its notes from shareholders is $2.2 million.
NOTE C -- ADVISORY AND MANAGEMENT AGREEMENTS
The Company has entered into advisory and management agreements under which
Shurgard advises the Company with respect to its investments, manages the
Company's day-to-day operations, and provides property management services. The
agreements provide for an annual advisory fee, incentive advisory fees,
reimbursement for certain costs and expenses, and property management fees. The
property management fee is equal to 6% of gross storage center revenues and 5%
of office and business park revenues. The annual advisory fee is equal to 0.5%
of the fair market value of new properties acquired after the initial
acquisition (Note E), mortgage loans receivable held and the average daily cash
equivalents invested in excess of cash equivalents acquired from the
Partnerships. The incentive advisory fee equals 10% of realized gain on sale or
refinancing of properties acquired after the initial acquisition. During the
period ended September 30, 1994, $2,753,000 was paid under these agreements.
NOTE D -- STORAGE CENTERS
Storage centers at September 30, 1994 consist of the following (in
thousands):
<TABLE>
<S> <C>
Land.............................................. $ 87,908
Buildings......................................... 366,966
Equipment......................................... 4,526
--------
459,400
Less accumulated depreciation..................... (7,601)
--------
$451,799
--------
--------
</TABLE>
NOTE E -- ACQUISITIONS
On March 1, 1994, the Company acquired the assets, subject to existing
liabilities, of each of the Partnerships for $387 million. A summary of the
assets and liabilities assumed in this transaction are as follows (in
thousands):
<TABLE>
<S> <C>
Real estate....................................... $417,218
Interest in joint ventures........................ 7,074
Cash, receivables and other assets................ 10,642
Notes payable..................................... (26,192)
Other liabilities................................. (21,326)
--------
$387,416
--------
--------
</TABLE>
The acquisition was funded by the issuance of 16,983,728 shares of common
stock and $67,068,631 in proceeds from a note payable to a financial services
company. Assets assumed by the
F-8
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JULY 23, 1993 (INCEPTION) TO DECEMBER 31, 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE E -- ACQUISITIONS (CONTINUED)
Company included approximately $2,947,000 in cash. Real estate assets acquired
in the acquisition consisted of 134 self-service storage centers and two
business parks located in 17 states, as well as an interest in two joint
ventures owning an additional five storage centers.
The following unaudited pro forma financial information represents the
results of operations of the Company as if the acquisition had occurred on
January 1, 1993. The pro forma results do not necessarily indicate the actual
results that would have been obtained, nor are they necessarily indicative of
the future operations of the combined companies.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1993 SEPTEMBER 30, 1994
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues............................... $72,900 $58,777
Expenses
Operating............................ 16,840 13,530
Property management fees............. 4,317 3,480
Depreciation and amortization........ 12,887 9,740
Real estate taxes.................... 7,068 5,250
Interest............................. 10,303 7,931
General, administrative and other.... 2,390 2,133
-------- --------
53,805 42,064
-------- --------
Income before extraordinary item....... $19,095 $16,713
-------- --------
-------- --------
</TABLE>
On September 1, 1994, the Company purchased 20 storage centers for $34
million from an unaffiliated seller. These centers, located in Maryland,
Virginia and North Carolina, were financed through a $30 million draw on the
Company's credit facility, a $1 million note to the seller and approximately $3
million from cash reserves. The note to the seller is due in two $500,000
installments in September 1995 and 1996, which installments include accrued
interest. The discounted value of these notes is estimated to be $917,000.
In July 1994, the Company entered into a joint venture with a storage
operator and developer to develop a property in Nashville, Tennessee. The
Company will have a 67% interest in this project, which will initially have
59,700 net rentable square feet and is expected to be complete in early 1995.
The Company's investment in this project is $600,000. The Company has guaranteed
repayment of $833,500 of the joint venture's construction loan.
In November 1994, the Company entered into a second joint venture with the
same developer to develop a second property in Nashville, Tennessee. The Company
will have a 50% interest in this project, which will initially have 67,700 net
rentable square feet and is expected to be complete in early 1995. The Company's
investment in this project is $640,000. The Company has guaranteed repayment of
$1,110,700 of the joint venture's construction loan.
F-9
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JULY 23, 1993 (INCEPTION) TO DECEMBER 31, 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE E -- ACQUISITIONS (CONTINUED)
In January 1995, the Company entered into a third joint venture the same
developer to develop a third property in Nashville, Tennessee. The Company will
have a 91.2% interest in this project, which will initially have 55,000 net
rentable square feet and is expected to be complete in late 1995. The Company's
investment in this project is $2,500,000.
In October 1994, the Company entered into a commitment to invest up to $3
million in a Belgian partnership that will own and operate storage centers in
the Benelux region of Europe.
As of December 14, 1994, the Company has paid $12 million and committed an
additional $1 million for investment in two 10-year participating mortgage
loans, which are nonrecourse to the borrower and are secured by real estate,
including four storage centers and office/warehouse space. The Company will
receive interest at 8% per annum plus 50% of both operating cash flow and
distributions from the sale of real property. The Company has options to
purchase the properties at established prices, generally exercisable in five
years and extending until maturity of the loans.
The Company is currently negotiating with a committee of independent
directors of Shurgard to merge the management, acquisition, development, and
advisory business of Shurgard into the Company. The potential merger is subject
to a vote of the shareholders of the Company and Shurgard.
NOTE F -- LINES OF CREDIT
In August 1994, the Company established a $50 million revolving two-year
credit facility with a commercial bank group. This credit facility is secured by
real estate and accrues interest at 7.33% for the first six months, and
thereafter at either the banks' prime rate or LIBOR plus 200 basis points (at
the Company's option). The commitment fee for the revolving period was 75 basis
points of the commitment amount. Upon the expiration of the revolving period,
the Company can extend any outstanding balance for a one-year term for an
additional fee of 37.5 basis points of the amount outstanding. At December 16,
1994, $42 million was outstanding on this credit facility; outstanding balances
are payable upon expiration of the line in August 1996.
Additionally, in August 1994, the Company executed a commitment letter with
Nomura Asset Capital Corp., a subsidiary of Nomura Securities International,
Inc., to provide a second $50 million two-year revolving credit facility. This
credit facility will be secured by real estate, bear interest at LIBOR plus 175
basis points, and require a draw fee equal to 25 basis points of the amount
drawn. The commitment fee for the revolving period will be 100 basis points of
the commitment amount. The commitment is subject to customary contingencies and
due diligence.
NOTE G -- NOTES PAYABLE
Notes payable at September 30, 1994 consist of the following (in thousands):
<TABLE>
<S> <C>
Note payable to financial services company........ $122,580
Mortgage note payable............................. 1,468
Other notes payable............................... 1,073
--------
$125,121
--------
--------
</TABLE>
On June 9, 1994, the Company refinanced substantially all of its existing
debt with Nomura Asset Capital Corp., a subsidiary of Nomura Securities
International, Inc., through a debt purchase transaction. The $122.58 million
loan provides the Company with funds for seven years at a fixed rate equal to
8.28% and requires monthly payments of interest only until maturity. The
refinancing of existing debt
F-10
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JULY 23, 1993 (INCEPTION) TO DECEMBER 31, 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE G -- NOTES PAYABLE (CONTINUED)
resulted in a loss on early retirement of $1.18 million, consisting of
unamortized loan fees. As required by the loan agreement, the Company deposited
cash into restricted accounts to fund certain expenses, including real estate
taxes and insurance.
The mortgage note is secured by a deed of trust on a storage center. It is
due in monthly installments of $13,441, including principal and interest at
10.25%, and matures April 2001. Other notes payable consists of local
improvement district warrants and a note taken in connection with a real estate
acquisition. The approximate maturities of principal over the next five fiscal
years range from $20,000 to $516,000.
NOTE H -- SHAREHOLDERS' EQUITY
In addition to the rights, privileges and powers of Class A common stock,
Class B common shareholders received loans from the Company to fund certain
obligations to the Partnerships. The loans are due between 2001 and 2003 and are
secured by the Class B common stock. Class B common stock is convertible to
Class A common stock at a one-to-one ratio as the loans are repaid.
The Company has authorized 40,000,000 shares of preferred stock, of which
2,800,000 shares have been designated Series A Junior Participating Preferred
Stock. No shares of preferred stock are issued and outstanding at September 30,
1994. The Company's Board of Directors is authorized to determine the rights,
preferences and privileges of the preferred stock, including the number of
shares constituting any such series, and the designation thereof.
NOTE I -- STOCK OPTIONS
The Company has established the 1993 Stock Option Plan (the "Plan") for the
purpose of attracting and retaining the Company's directors, executive officers
and other employees. The Plan provides for the granting of options for up to 3%
of the Company's outstanding shares of Class A common stock at the end of each
year, limited in the aggregate to 5,000,000 shares. In general, the options vest
ratably over five years and must be exercised within 10 years from date of
grant. The exercise price for qualified incentive options under the Plan must be
at least equal to fair market value at date of grant and at least 85% of fair
market value at date of grant for nonqualified options. The Plan expires in
2003. At September 30, 1994, 8,000 options had been granted under the Plan at an
exercise price of $18.90 per share. No options had been granted at December 31,
1993.
The Company also has established the Stock Option Plan for Nonemployee
Directors (the "Nonemployee Plan") for the purpose of attracting and retaining
the services of experienced and knowledgeable outside directors. The Nonemployee
Plan provides for the annual grant of options to purchase 400 shares of Class A
common stock. Such options vest upon continued service until the next annual
meeting of the Company's shareholders. A total of 20,000 shares are reserved
under the Nonemployee Plan. The exercise price for options granted under the
Nonemployee Plan is equal to fair market value at date of grant. At September
30, 1994, options for 1,200 shares had been granted under the Nonemployee Plan
at an exercise price of $22.93 per share.
NOTE J -- SHAREHOLDER RIGHTS PLAN
In March 1994, the Company adopted a Shareholder Rights Plan and declared a
dividend distribution of one Right for each outstanding share of common stock.
Under certain conditions, each Right may be exercised to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
purchase price of $65, subject to adjustment. The Rights will be exercisable
only if a person or group has acquired 10% or more of the outstanding shares of
common stock, or following the
F-11
<PAGE>
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JULY 23, 1993 (INCEPTION) TO DECEMBER 31, 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE J -- SHAREHOLDER RIGHTS PLAN (CONTINUED)
commencement of a tender or exchange offer for 10% or more of such outstanding
shares of common stock. If a person or group acquires more than 10% of the
then-outstanding shares of common stock, each Right will entitle its holder to
receive, upon exercise, common stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right. In addition, if the Company is acquired in a
merger or other business combination transaction, each Right will entitle its
holder to purchase that number of the acquiring company's common shares having a
market value of twice the Right's exercise price. The Company will be entitled
to redeem the Rights at $.0001 per Right at any time prior to the earlier of
expiration of the Rights in March 2004 and the time that a person has acquired a
10% position. The Rights do not have voting or dividend rights, and, until they
become exercisable, have no dilutive effect on the Company's earnings.
F-12
<PAGE>
SHURGARD STORAGE CENTERS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1993 (1) 1994 (2)
------------- -------------
<S> <C> <C>
Rental revenue.................................. $53,969 $58,029
Income from joint venture....................... 68 140
Interest income................................. 196 608
Litigation settlement........................... 317
------------- -------------
Total revenues................................ 54,550 58,777
Operating expense............................... 12,793 13,530
Management fees................................. 3,502 3,480
Depreciation and amortization................... 10,420 9,740
Real estate taxes............................... 5,257 5,250
General and administrative...................... 1,786 1,950
Other........................................... 132 183
Interest........................................ 1,716 7,931
------------- -------------
Total expenses................................ 35,606 42,064
------------- -------------
Income before extraordinary item................ $18,944 $16,713
------------- -------------
------------- -------------
Income before extraordinary item per common and
common equivalent share (3).................... $0.92 $0.98
------------- -------------
------------- -------------
<FN>
- ------------------------
(1) Amounts represent the combined results of operations of each of the 17
partnerships consolidated into the Shurgard REIT on March 1, 1994 (the
"Consolidation").
(2) Amounts represent pro forma results of operations as if the Consolidation
had occurred and the current debt structure existed on January 1, 1994.
(3) Pro forma per share data is based on the outstanding common and common
equivalent shares of the Shurgard REIT at September 30, 1994 (16,989,739
shares). Historical 1993 per share data is based on the equivalent number
of shares assuming all unit holders elected to receive shares in the
Consolidation (20,500,000 shares).
</TABLE>
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Shurgard Incorporated
Seattle, Washington
We have audited the accompanying statement of assets and liabilities of the
property management, acquisition, development and advisory business of Shurgard
Incorporated (the "Management Company") as of December 31, 1993, and the related
statements of revenues, expenses, and changes in Management Company equity and
of cash flows of the Management Company for the year ended December 31, 1993.
These financial statements are the responsibility of Shurgard Incorporated's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the assets and liabilities of the Management Company of Shurgard
Incorporated as of December 31, 1993, and the revenues, expenses, and changes in
Management Company equity and cash flows of the Management Company for the year
ended December 31, 1993, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Seattle, Washington
December 16, 1994
F-14
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1992 1993 1994
---------- ------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............... $1,349 $ 53 $ 888
Due from affiliates..................... 671 839 1,404
Partnership consolidation costs
receivable............................. 1,546 4,447
Other................................... 60 90 85
---------- ------- -------------
Total................................. 3,626 5,429 2,377
FIXED ASSETS, net of accumulated
depreciation of $949, $1,063 and
$1,226................................... 462 7,612 7,570
OTHER..................................... 364 1,154 1,506
---------- ------- -------------
$4,452 $14,195 $11,453
---------- ------- -------------
---------- ------- -------------
CURRENT LIABILITIES
Lines of credit......................... $ 299 $ 50
Accounts payable........................ 289 256 $ 286
Accrued salaries and expenses........... 513 808 563
Accrued partnership consolidation
costs.................................. 728 2,520
Accrued profit sharing.................. 281 226 430
---------- ------- -------------
Total................................. 2,110 3,860 1,279
LONG-TERM DEBT............................ -- 7,275 7,275
COMMITMENTS AND CONTINGENCIES (Notes H and
J)
MANAGEMENT COMPANY EQUITY................. 2,342 3,060 2,899
---------- ------- -------------
$4,452 $14,195 $11,453
---------- ------- -------------
---------- ------- -------------
</TABLE>
See notes to financial statements
F-15
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN
MANAGEMENT COMPANY EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------- SEPTEMBER 30,
1991 1992 1993 1994
----------- ----------- ------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Management fees........................... $4,606 $5,630 $6,448 $5,419
Acquisition and development fees.......... 611 473 86 26
Reimbursements from affiliates............ 1,201 1,086 1,466 1,798
Rental revenues........................... 48 776
----------- ----------- ------ -------------
Total................................. 6,418 7,189 8,048 8,019
EXPENSES
Personnel................................. 3,760 4,348 4,803 3,942
General and administrative................ 918 1,218 1,353 1,167
Travel.................................... 369 399 507 388
Rent...................................... 350 359 410 301
----------- ----------- ------ -------------
Total................................. 5,397 6,324 7,073 5,798
----------- ----------- ------ -------------
EXCESS FROM MANAGEMENT COMPANY OPERATIONS... 1,021 865 975 2,221
OTHER INCOME (EXPENSE)
Interest expense.......................... (55) (8) (36) (528)
Equity in earnings of affiliated
partnerships............................. 163 160 243 226
Interest income........................... 37 43 124 81
Gain on sale of land...................... 337
----------- ----------- ------ -------------
Total................................. 145 532 331 (221)
----------- ----------- ------ -------------
EXCESS FROM MANAGEMENT COMPANY.............. 1,166 1,397 1,306 2,000
----------- ----------- ------ -------------
Management Company equity, beginning of
period..................................... 2,118 1,978 2,342 3,060
Distributions made to other non-Management
Company businesses......................... (1,456) (1,033) (588) (2,161)
----------- ----------- ------ -------------
Management Company equity, end of period.... $1,978 $2,342 $3,060 $2,899
----------- ----------- ------ -------------
----------- ----------- ------ -------------
</TABLE>
See notes to financial statements
F-16
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- SEPTEMBER 30,
1991 1992 1993 1994
----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Excess from Management Company............................. $ 1,166 $ 1,397 $ 1,306 $ 2,000
Adjustments to reconcile net earnings to cash provided by
operating activities:
Gain on sale of land..................................... (337)
Depreciation and amortization............................ 123 155 124 190
Provision for note receivable............................ 35
Changes in operating accounts:
Due from affiliates...................................... 243 174 (168) (565)
Other current assets..................................... (148) 160 (30) 5
Accounts payable......................................... 458 (199) (33) 30
Accrued salaries and expenses............................ (81) 323 295 (245)
Accrued profit sharing................................... 75 (44) (55) 204
----------- ----------- --------- -------------
Net cash provided by operating activities.................. 1,871 1,629 1,439 1,619
----------- ----------- --------- -------------
INVESTING ACTIVITIES:
Net proceeds from sale of land............................. 1,174
Partnership reorganization costs........................... (818) (1,109) 1,927
Purchase of equipment and leasehold improvements, net...... (231) (75) (55) (131)
Other assets............................................... (11) (53) (734) (369)
----------- ----------- --------- -------------
Net cash (used in) provided by investing activities........ (242) 228 (1,898) 1,427
----------- ----------- --------- -------------
FINANCING ACTIVITIES:
Notes due from affiliates.................................. 10 50
Payments on line of credit, net............................ (100) (249) (50)
Distributions made to other non-Management Company
businesses................................................ (1,456) (1,033) (588) (2,161)
----------- ----------- --------- -------------
Net cash used in financing activities...................... (1,546) (983) (837) (2,211)
----------- ----------- --------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 83 874 (1,296) 835
CASH AND CASH EQUIVALENTS:
Beginning of period...................................... 392 475 1,349 53
----------- ----------- --------- -------------
End of period............................................ $ 475 $ 1,349 $ 53 $ 888
----------- ----------- --------- -------------
----------- ----------- --------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................... $ 55 $ 8 $ 36 $ 528
----------- ----------- --------- -------------
----------- ----------- --------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred in connection with purchase of
storage center.......................................... $ -- $ -- $ 7,275 $ --
----------- ----------- --------- -------------
----------- ----------- --------- -------------
Liabilities incurred in connection with Partnership
reorganization.......................................... $ -- $ 728 $ 1,792 $ --
----------- ----------- --------- -------------
----------- ----------- --------- -------------
</TABLE>
F-17
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in connection with the Agreement and Plan of Merger (the "Merger
Agreement") between Shurgard Incorporated ("Shurgard") and Shurgard Storage
Centers, Inc. ("SSCI") under which SSCI would effectively acquire Shurgard's
property management, acquisition, development and advisory business (the
"Management Company") in exchange for common stock of SSCI. The merger is
subject to the approval of the shareholders of SSCI and Shurgard.
The accompanying financial statements have been prepared from the books and
records of Shurgard and present the assets and liabilities of the Management
Company as of December 31, 1993 and 1992 and September 30, 1994, and the related
revenues and expenses for the years ended December 31, 1993, 1992 and 1991 and
the period ended September 30, 1994. Accordingly, these statements do not
purport to represent the financial position or results of operations of Shurgard
or any of its subsidiaries.
The statement of revenues and expenses of the Management Company to be
merged into SSCI may not necessarily be indicative of the revenues and expenses
that would have resulted had the operations of the Management Company functioned
as a stand-alone entity. The financial statements exclude the effects of income
taxes, and, in accordance with the Agreement, to the extent that an asset or
liability for income taxes of the Management Company exists at the closing date
of the Merger, such amounts will be added to or deducted from the purchase price
as such taxes are intended to be neutral to SSCI. Distributions made to other
non-Management Company businesses shown in the accompanying financial statements
reflect amounts generated by the operations of the Management Company that have
been utilized by other businesses of Shurgard. Such amounts are treated as
distributions from Management Company equity.
The statements of assets and liabilities as of December 31, 1992 and 1991
and September 30, 1994 and the statements of revenues and expenses for the years
ended December 31, 1992 and 1991 and the nine months ended September 30, 1994,
which are included in this report, are unaudited. In the opinion of Shurgard's
management, all adjustments necessary for a fair presentation of such financial
statements have been included; such adjustments consisted only of normal
recurring items. Interim results are not necessarily indicative of results for a
full year.
F-18
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS: The Management Company includes the ownership, operation and
management of storage centers, as well as acquisition, development and advisory
services. The Management Company earns revenues, fees and reimbursements for:
- Management of property operations. The Management Company generally
earns a monthly management fee based on a percentage of gross revenues.
- Acquisition and development of self-storage properties. The Management
Company is generally compensated for these services when provided to
affiliates based on a fixed percentage of gross proceeds from the offering
of partnership interests or of invested capital.
- Reimbursement of allowable costs. Under the terms of the affiliated
partnership and SSCI agreements, certain costs are reimbursable to the
Management Company for services, such as construction management, legal
services, computer support and national marketing programs.
- Advisory services. Under agreements with SSCI, the Management Company
provides certain advisory services with respect to SSCI's investments and
provides the day-to-day administrative functions of SSCI. The Management
Company is compensated for these services based on the value of certain
assets acquired after March 1, 1994.
CASH EQUIVALENTS: Cash equivalents consist of money market instruments with
original maturities of 90 days or less.
LAND, BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS: The Management
Company owns and operates a storage center located in Daly City, California.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the building, furniture and fixtures, equipment and vehicles as
follows:
<TABLE>
<S> <C>
Building...................................... 39 years
Furniture and fixtures........................ 5 to 7 years
Equipment and vehicles........................ 3 to 7 years
</TABLE>
Leasehold improvements are depreciated over the life of the related lease.
Land includes $206,364 of excess land held for sale.
NOTE B -- TRANSACTIONS WITH AFFILIATES
Prior to March 1, 1994, substantially all of the Management Company's fees
and reimbursements were generated from services performed for affiliated
partnerships in which the majority shareholders of Shurgard held limited
partnership or general partnership interests. The Management Company provides a
variety of services for the partnerships as discussed in Note A.
On March 1, 1994, 17 of the affiliated partnerships were consolidated into
SSCI. At that time Shurgard signed various agreements with SSCI, which will be
included in the Management Company, under which agreements the Management
Company manages and advises SSCI. For the period ended September 30, 1994, 47%
of total revenues was earned from SSCI; 53% was earned from the remaining
affiliated partnerships.
Due from affiliates consists of property management fees, cost
reimbursements and acquisition fees payable by affiliated partnerships or by
SSCI; such amounts are payable on demand.
F-19
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE C -- ACQUISITION
On December 16, 1993, the Management Company purchased the Daly City storage
center, located near San Francisco, California, from a nonaffiliated entity for
$7,200,000 plus closing costs. The purchase was funded with proceeds of a
$7,275,000 nonrecourse mortgage note payable to a commercial insurance company
and cash. This loan is a participating mortgage, which is nonamortizing and
matures January 1, 2004. The loan requires: (a) monthly fixed interest only
payments at 8% per annum and (b) quarterly additional interest payments of 90%
of net cash flow, as defined in the loan agreement. Additional interest of
$99,353 was paid for the nine months ended September 30, 1994. No additional
interest was paid in 1993. Proceeds from a sale of the property will be split
90% to the mortgagor and 10% to the Management Company, subject to certain rates
of return. The loan is secured by a deed of trust on the property and an
assignment of leases.
The acquisition was accounted for as a purchase, and, accordingly, the cost
was allocated based on fair value as follows (in thousands):
<TABLE>
<S> <C>
Land.............................................. $1,713
Buildings......................................... 5,428
Furniture, fixtures and equipment................. 24
Intangible assets................................. 73
------
$7,238
------
------
</TABLE>
The following is unaudited pro forma combined revenues, expenses and excess
from Management Company operations for the year as if the property had been
acquired on January 1, 1992:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1992 1993
------- -------
<S> <C> <C>
Revenues.......................................... $ 8,132 $ 8,969
Expenses.......................................... (7,400) (7,587)
------- -------
Excess from Management Company operations......... (732) (1,382)
Other Income (Expense)............................ 532 (221)
------- -------
Excess from Management Company.................... $ 1,264 $ 1,161
------- -------
------- -------
</TABLE>
The pro forma information does not purport to be indicative of the results
that actually would have been obtained if the combined operations had been
conducted for the full year and is not intended to be a projection of future
results.
NOTE D -- PARTNERSHIP CONSOLIDATION COSTS RECEIVABLE
Partnership consolidation costs receivable consist of direct out-of-pocket
costs such as appraisals and legal fees incurred in connection with the
consolidation of 17 affiliated public limited partnerships into SSCI. The
consolidation closed in March 1994 and partnership consolidation costs were paid
to the Management Company on March 4, 1994.
F-20
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE E -- OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS
------------ ENDED
1992 1993 SEPTEMBER 30, 1994
---- ------ ------------------
<S> <C> <C> <C>
Storage center management system... $101 $ 835 $1,017
Other.............................. 263 319 489
---- ------ -------
$364 $1,154 $1,506
---- ------ -------
---- ------ -------
</TABLE>
The storage center management system represents costs incurred in the
development of software, the cost of which, beginning in 1995, will be
reimbursed to the Management Company by affiliated entities after the system is
fully installed.
NOTE F -- LINE OF CREDIT AND LONG-TERM DEBT
The Management Company's line of credit agreement with a commercial bank
provides for borrowings of up to $5,000,000 and expires in June 1995. The
agreement requires monthly payments of interest at the bank's prime rate plus
0.5% (8.0% at September 30, 1994) and is secured by accounts receivable,
equipment and other assets of the Management Company. The agreement contains
restrictive covenants that, among others, (a) require that the Management
Company maintain minimum levels of working capital and tangible net worth and
(b) prohibit the declaration or payment of dividends to shareholders without
prior consent.
Long-term debt is comprised of the $7,275,000 mortgage note payable
described in Note C.
NOTE G -- FIXED ASSETS
Fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS
-------------- ENDED
1992 1993 SEPTEMBER 30, 1994
------ ------ ------------------
<S> <C> <C> <C>
Land............................. $ 205 $1,919 $1,919
Buildings........................ 5,460 5,460
Furniture, fixtures and
equipment....................... 1,034 1,131 1,262
Leasehold improvements........... 172 165 165
------ ------ -------
1,411 8,675 8,806
Less accumulated depreciation.... 949 1,063 1,236
------ ------ -------
$ 462 $7,612 $7,570
------ ------ -------
------ ------ -------
</TABLE>
F-21
<PAGE>
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE H -- COMMITMENTS
Shurgard has entered into several operating leases for district offices,
which leases continue through 1998. Monthly lease payments are based on fixed
rates adjusted by negotiated periodic increases. Future minimum payments under
these noncancellable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1994.............................................. $ 367
1995.............................................. 371
1996.............................................. 324
1997.............................................. 250
1998.............................................. 176
------
$1,488
------
------
</TABLE>
Shurgard has entered into buy-sell agreements with certain Management
Company employees under which the employees purchased 561,174 shares of
Shurgard's stock. Shurgard is obligated to repurchase such stock upon
termination of employment or certain other conditions. The repurchase price will
be determined in accordance with a formula in the buy-sell agreements that is
based on fair value as determined by annual independent valuation. These
agreements will be cancelled prior to the Merger.
In October 1994, the Management Company signed a letter of intent to invest
in a Belgian company that will develop and operate storage centers in the
Benelux region of Europe. Pursuant to that letter, the Management Company has
made a $250,000 working capital loan to Shurgard Benelux SA and has committed to
loan an additional $500,000.
In conjunction with the Merger, the Management Company committed to fund one
of its subsidiaries. At December 16, 1994, $1.6 million of this commitment
remained.
NOTE I -- EMPLOYEE BENEFIT PLANS
The Management Company employees participate in Shurgard's employee stock
ownership ("ESOP") and incentive savings ("401(k)") plans that cover
substantially all employees of the Management Company. Under the ESOP, Shurgard,
at the discretion of its Board of Directors, may contribute a portion of the
employee profit-sharing awards to the ESOP in cash or in qualified securities of
Shurgard. Under the 401(k) plan, each year employees may contribute between 1%
and 15% of their annual compensation to the plan. Shurgard, at its sole
discretion, may match a portion of the employees' contribution. In the years
ended December 31, 1992 and 1993 and the nine months ended September 30, 1994,
Shurgard made contributions to the ESOP on behalf of Management Company
employees of approximately $16,000, $39,000 and $37,000, respectively; no
contribution was made in 1991. Under the Merger Agreement, the ESOP and 401(k)
plan will be continued by SSCI.
NOTE J -- CONTINGENCIES
Shurgard is the general partner of Shurgard Limited Edition I, a partnership
which owns a storage center. The Management Company has guaranteed 20% of the
outstanding long-term debt, which total debt was $1,211,000 at September 30,
1994, and is secured by real estate.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Partners
Entities Listed in Note A
Seattle, Washington
We have audited the accompanying combined balance sheets of 17 limited
partnerships (the "Partnerships") described in Note A, as of December 31, 1993
and 1992, and the related combined statements of earnings, partners' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1993. These financial statements are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Partnerships as of December 31,
1993 and 1992, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
December 16, 1994
F-23
<PAGE>
THE PARTNERSHIPS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1992 1993 MARCH 1, 1994
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................. $ 9,859 $ 9,057 $ 76,546
Stock in Shurgard Storage Centers, Inc.... 315,007
Storage centers........................... 382,494 375,035
Other assets.............................. 7,829 9,890 132
-------- -------- -------------
Total assets.......................... $400,182 $393,982 $391,685
-------- -------- -------------
-------- -------- -------------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses... $ 3,598 $ 5,407 $ --
Accrued consolidation expense........... 3,879
Unearned rent and tenant deposits....... 2,291 2,188
Accrued real estate taxes............... 2,134 2,330
Distributions payable................... 391,685
Lines of credit......................... 1,570 4,190
Notes payable........................... 22,795 21,826
-------- -------- -------------
Total liabilities..................... 32,388 39,820 391,685
-------- -------- -------------
Partners' equity (deficit):
Limited partners........................ 368,292 354,787
General partners........................ (498) (625)
-------- -------- -------------
Total partners' equity................ 367,794 354,162
-------- -------- -------------
Total liabilities and partners'
equity............................. $400,182 $393,982 $391,685
-------- -------- -------------
-------- -------- -------------
</TABLE>
See notes to combined financial statements
F-24
<PAGE>
THE PARTNERSHIPS
COMBINED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------- JANUARY 1, 1994 TO
1991 1992 1993 MARCH 1, 1994
------- ------- ------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
RENTAL REVENUE
Rental........................ $59,142 $66,994 $72,217 $12,348
Other......................... 1,625 79 93 15
------- ------- ------- --------
Total....................... 60,767 67,073 72,310 12,363
EXPENSES
Operating..................... 13,847 15,554 16,843 2,956
Property management fees...... 3,695 4,145 4,695 733
Depreciation.................. 12,987 13,311 13,665 2,347
Real estate taxes............. 6,216 7,067 7,066 1,170
Amortization.................. 455 246 258 43
Administrative................ 2,206 2,359 2,390 1,232
------- ------- ------- --------
Total....................... 39,406 42,682 44,917 8,481
------- ------- ------- --------
EARNINGS FROM OPERATIONS........ 21,361 24,391 27,393 3,882
------- ------- ------- --------
OTHER INCOME AND EXPENSES
Interest and other income..... 649 317 590 188
Gain on sale of real estate... 946
Interest expense.............. (2,545) (2,347) (2,288) (487)
Loss on condemnation.......... (306)
Incentive management fees..... (5,340)
Gain on consolidation......... 48,223
Litigation, hostile takeover
defense and consolidation
expenses..................... (7,411) (12,180)
------- ------- ------- --------
(950) (2,336) (9,109) 30,404
------- ------- ------- --------
EARNINGS........................ $20,411 $22,055 $18,284 $34,286
------- ------- ------- --------
------- ------- ------- --------
EARNINGS PER UNIT OF LIMITED
PARTNERSHIP INTEREST........... $38.08 $41.15 $34.08 $63.97
------- ------- ------- --------
------- ------- ------- --------
DISTRIBUTIONS PER UNIT OF
LIMITED PARTNERSHIP INTEREST... $60.45 $56.71 $59.57 $732.05
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
See notes to combined financial statements
F-25
<PAGE>
THE PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNERS TOTAL
--------- ------- ---------
<S> <C> <C> <C>
Balance, January 1, 1991........................ $ 388,417 $ (317) $ 388,100
Distributions................................... (32,075) (313) (32,388)
Earnings........................................ 20,207 204 20,411
--------- ------- ---------
Balance, December 31, 1991...................... 376,549 (426) 376,123
Distributions................................... (30,092) (293) (30,385)
Earnings........................................ 21,835 221 22,056
--------- ------- ---------
Balance, December 31, 1992...................... 368,292 (498) 367,794
Distributions................................... (31,606) (310) (31,916)
Earnings........................................ 18,101 183 18,284
--------- ------- ---------
Balance, December 31, 1993...................... 354,787 (625) 354,162
Distributions................................... (388,432) (4,018) (392,450)
Contribution.................................... 4,002 4,002
Earnings........................................ 33,645 641 34,286
--------- ------- ---------
Balance, March 1, 1994 (unaudited).............. $ -- $ -- $ --
--------- ------- ---------
--------- ------- ---------
</TABLE>
See notes to combined financial statements
F-26
<PAGE>
THE PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
---------------------------- JANUARY 1, 1994
1991 1992 1993 TO MARCH 1, 1994
-------- -------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Earnings......................................... $ 20,411 $ 22,055 $ 18,284 $ 34,286
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization.................. 13,442 13,557 13,923 2,390
Gain on consolidation.......................... (48,223)
Loss on condemnation........................... 306
Gain on sale of real estate.................... (946)
Changes in operating accounts:
Other assets................................. (191) (431) (2,594) 2,675
Accounts payable and accrued expenses........ 644 22 2,135 (1,712)
Accrued real estate taxes.................... 423 (89) 235 (948)
Accrued consolidation expense................ 3,879 16,399
Unearned rent and tenant deposits............ 296 (50) (102) 249
-------- -------- -------- ----------------
Net cash provided by operating activities...... 34,079 35,370 35,760 5,116
-------- -------- -------- ----------------
INVESTING ACTIVITIES
Purchase of and improvements to storage
centers......................................... (4,084) (5,364) (5,888) (1,158)
Proceeds from sale of real estate and
equipment....................................... 7,696
Proceeds from consolidation...................... 64,120
Consideration for amortizable assets............. (393)
Improvements to real estate held for resale...... (188)
Distributions in excess of earnings from
investment in joint partnership................. 224 306
-------- -------- -------- ----------------
Net cash provided by (used in) investing
activities.................................... 3,031 (5,140) (5,582) 62,962
-------- -------- -------- ----------------
FINANCING ACTIVITIES
Distributions to partners........................ (32,388) (30,384) (31,916) (764)
Distributions to minority interest in joint
partnership..................................... (279) (577) (711)
Proceeds from lines of credit.................... 2,620 680
Proceeds from notes payable...................... 5,325 2,125 350
Payment of loan costs............................ (167) (26) (4)
Payments on notes payable........................ (6,106) (2,756) (969) (855)
-------- -------- -------- ----------------
Net cash used in financing activities.......... (33,615) (31,618) (30,980) (589)
-------- -------- -------- ----------------
Increase (decrease) in cash and short-term
investment...................................... 3,495 (1,388) (802) 67,489
Cash and cash equivalents at beginning of
period.......................................... 7,752 11,247 9,859 9,057
-------- -------- -------- ----------------
Cash and cash equivalents at end of period....... $ 11,247 $ 9,859 $ 9,057 $ 76,546
-------- -------- -------- ----------------
-------- -------- -------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year for interest............... $ 2,619 $ 2,349 $ 2,287 $ 487
-------- -------- -------- ----------------
-------- -------- -------- ----------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES
Liabilities incurred in connection with the
construction of storage centers................. $ 3,130 $ 973 $ 206 $--
-------- -------- -------- ----------------
-------- -------- -------- ----------------
Liabilities assumed by purchaser in connection
with the sale of real estate.................... $ 183 $ -- $ -- $--
-------- -------- -------- ----------------
-------- -------- -------- ----------------
Receivables netted against the final payment for
the purchase of a storage center................ $ 1,328 $ -- $ -- $--
-------- -------- -------- ----------------
-------- -------- -------- ----------------
</TABLE>
See notes to combined financial statements
F-27
<PAGE>
THE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
PERIOD ENDED MARCH 1, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: These combined financial statements include the
accounts of the 17 publicly held limited partnerships sponsored by Shurgard
Incorporated ("Shurgard") as follows:
Shurgard Mini-Storage Limited Partnership I
Shurgard Income Properties II
Shurgard Income Properties III, a Real Estate Limited Partnership
Shurgard Income Properties IV, a Real Estate Limited Partnership
Shurgard Income Properties Five, a Real Estate Limited Partnership
Shurgard Income Properties Six, a Real Estate Limited Partnership
Shurgard Income Properties Seven, a Real Estate Limited Partnership
Shurgard Income Properties Eight, a Real Estate Limited Partnership
Shurgard Income Properties Nine, a Real Estate Limited Partnership
Shurgard Income Properties Ten, a Real Estate Limited Partnership
Shurgard Income Properties Eleven, a Real Estate Limited Partnership
Shurgard Income Properties Twelve, a Real Estate Limited Partnership
Shurgard Income Properties -- Fund 14 Limited Partnership
Shurgard Growth Capital -- Fund 15 Limited Partnership
Shurgard Income Properties -- Fund 16 Limited Partnership
Shurgard Growth Capital -- Fund 17 Limited Partnership
Shurgard Income Properties -- Fund 18 Limited Partnership
Each partnership is hereinafter referred to as "Shurgard 1," "Shurgard 2,"
etc., and collectively as the "Partnerships."
The combined statements include the accounts of Shurgard 1 and Shurgard 5
through Shurgard 18 for each of the three years ended December 31, 1993 and the
accounts of Shurgard 2, Shurgard 3 and Shurgard 4 for each of the three years in
the period ended September 30, 1993, as these partnerships have September 30
fiscal year-ends.
The financial statements for the period ended March 1, 1994, which are
included in this report, are unaudited. In the opinion of management, all
adjustments necessary for the fair presentation of such financial statements
have been included, which adjustments consisted only of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
On March 1, 1994, the Partnerships were consolidated into Shurgard Storage
Centers, Inc. ("SSCI") through a roll-up transaction approved by the partners.
Each of the Partnerships received stock in SSCI or cash for its units of
partnership interest. Such cash and stock were distributed to the partners in
March 1994, at which time the Partnerships ceased to exist. In conjunction with
this transaction the Partnerships recognized a gain on consolidation of $48.2
million. Additionally, the Partnerships paid $5.3 million of incentive
management fees to Shurgard and incurred $12 million of costs for litigation,
hostile takeover defense and other professional fees related to the
consolidation.
All interpartnership balances and transactions have been eliminated upon
combination.
CASH EQUIVALENTS: Cash equivalents consist of money market instruments with
maturities of 30 days or less.
F-28
<PAGE>
THE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
PERIOD ENDED MARCH 1, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STORAGE CENTERS: Storage centers, including land, buildings and equipment,
are recorded at cost. Depreciation on buildings and equipment is recorded on a
straight-line basis over their estimated useful lives, which range from three to
thirty-one years.
RENTAL REVENUE: Rental revenue is recognized as earned under accrual
accounting principles.
TAXES ON INCOME: The financial statements do not reflect a provision for
federal income taxes because such taxes are the responsibility of the individual
partners.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Earnings per unit of
limited partnership interest is based on earnings allocated to the limited
partners divided by the number of limited partnership units outstanding during
the year (530,607 for the years ended December 31, 1991, 1992 and 1993 and the
period ended March 1, 1994).
DISTRIBUTIONS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Distributions per
unit of limited partnership interest is based on the total amount distributed to
the limited partners divided by the number of limited partnership units
outstanding during the year (530,607 for the years ended December 31, 1991, 1992
and 1993 and the period ended March 1, 1994).
NOTE B -- STORAGE CENTERS
Storage centers consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1992 1993
-------- --------
<S> <C> <C>
Land.................................... $ 91,467 $ 91,868
Buildings............................... 358,119 363,918
Equipment............................... 12,521 13,612
-------- --------
462,107 469,398
Less accumulated depreciation........... (80,700) (94,363)
-------- --------
381,407 375,035
Construction in progress................ 1,087
-------- --------
$382,494 $375,035
-------- --------
-------- --------
</TABLE>
F-29
<PAGE>
THE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
PERIOD ENDED MARCH 1, 1994
NOTE C -- NOTES PAYABLE
Notes payable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1992 1993
------- -------
<S> <C> <C>
11% note, secured by real estate,
payable in monthly installments of
$68,608, including principal and
interest. This note was repaid on March
1, 1994................................ $ 5,778 $ 5,580
Adjustable note payable to a commercial
bank, secured by a deed of trust on a
storage center. Payable in monthly
installments of $17,434, including
principal and interest, due June 1998.
Interest rate at December 31, 1993 was
5.96%. The note was assumed by SSCI on
March 1, 1994.......................... 2,339 2,270
Fixed rate mortgage notes payable,
interest rates range from 9.25% to 11%,
with a weighted average rate of 10.38%
at December 31, 1993. Notes were either
repaid or assumed by SSCI on March 1,
1994................................... 6,841 6,586
Variable rate mortgage notes payable,
interest rates at December 31, 1993
ranged from 5.96% to 10.69%, with a
weighted average rate of 8.38%. Notes
were either repaid or assumed by SSCI
on March 1, 1994....................... 7,656 7,222
Other................................... 181 168
------- -------
$22,795 $21,826
------- -------
------- -------
</TABLE>
NOTE D -- LINES OF CREDIT
The Partnerships had various lines of credit totaling $5,675,000, secured by
real estate, that bore interest at .5% above the prime rate (6.5% at December
31, 1993) due monthly. The lines of credit were assumed by SSCI in connection
with the consolidation.
NOTE E -- TRANSACTIONS WITH AFFILIATES
In connection with the management of the storage centers, the Partnerships
have paid to Shurgard a property management fee of 6% of rental revenues.
F-30
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF MERGER
BETWEEN
SHURGARD STORAGE CENTERS, INC.,
a Delaware corporation,
and
SHURGARD INCORPORATED,
a Washington corporation,
dated as of
December 19, 1994
<PAGE>
CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS..................................................... 1
ARTICLE 2 THE MERGER; EFFECTIVE TIME; CLOSING............................. 6
2.1 The Merger....................................................... 6
2.2 Closing.......................................................... 6
2.3 Effective Time................................................... 6
ARTICLE 3 TERMS OF MERGER................................................. 7
3.1 Certificate of Incorporation..................................... 7
3.2 By-laws.......................................................... 7
3.3 Directors........................................................ 7
3.4 Officers......................................................... 7
ARTICLE 4 MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES;
ADJUSTMENTS............................................................... 7
4.1 Share Consideration; Conversion or Cancellation of Shares........ 7
4.2 Payment for Shares in the Merger................................. 9
4.3 Fractional Shares................................................ 10
4.4 Transfer of Shares After the Effective Time...................... 10
4.5 Lost, Stolen or Destroyed Certificates........................... 10
4.6 Dissenters' Rights............................................... 10
4.7 Additional Consideration......................................... 11
4.8 Indemnification Shares; Claims Against the Escrow................ 14
4.9 Appointment of Shareholders' Representatives..................... 16
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF MANAGEMENT COMPANY............
17
5.1 Organization, Etc. of Management Company......................... 17
5.2 Partnerships..................................................... 18
5.3 Agreement........................................................ 18
5.4 Capital Stock.................................................... 18
5.5 Litigation....................................................... 19
5.6 Compliance With Other Instruments, Etc........................... 19
5.7 Compensation and Employee Matters................................ 19
5.8 Employee Benefit Plans........................................... 19
5.9 Labor Matters.................................................... 21
5.10 Taxes............................................................ 21
5.11 Intellectual Property............................................ 21
5.12 Financial Statements............................................. 22
5.13 Absence of Certain Changes or Events............................. 22
5.14 Books and Records................................................ 23
5.15 Contracts and Leases............................................. 23
5.16 Title to Properties; Encumbrances................................ 23
5.17 Real Property.................................................... 23
5.18 Environmental Laws and Regulations............................... 24
5.19 Affiliated Transactions.......................................... 24
5.20 Brokers and Finders.............................................. 24
5.21 S-4 Registration Statement and Proxy Statement/Prospectus........ 25
5.22 Insurance........................................................ 25
5.23 Disclosure....................................................... 26
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF SHURGARD REIT................. 26
6.1 Organization, Etc. of Shurgard REIT.............................. 26
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
6.2 Subsidiaries..................................................... 26
6.3 Agreement........................................................ 27
6.4 Capital Stock.................................................... 27
6.5 Authorization for Shurgard REIT Common Shares.................... 27
6.6 Litigation....................................................... 27
6.7 Compliance With Other Instruments, Etc........................... 28
6.8 Reports and Financial Statements................................. 28
6.9 Brokers and Finders.............................................. 29
6.10 S-4 Registration Statement and Proxy Statement/Prospectus........ 29
6.11 Disclosure....................................................... 29
ARTICLE 7 ADDITIONAL COVENANTS AND AGREEMENTS............................. 29
7.1 Conduct of Business of Management Company........................ 29
7.2 Other Transactions............................................... 31
7.3 Meetings of Shareholders and Stockholders........................ 32
7.4 Registration Statement/Proxy Materials........................... 32
7.5 Filings; Other Action............................................ 33
7.6 Access to Information............................................ 33
7.7 Listing Application.............................................. 33
7.8 Affiliates of Management Company................................. 33
7.9 Tax Matters...................................................... 34
7.10 InterMation Spin-Off............................................. 35
7.11 Shurgard Realty Advisors......................................... 35
7.12 Management and Advisory Agreements............................... 36
7.13 Intellectual Property Rights..................................... 36
7.14 Employees........................................................ 36
7.15 Reorganization................................................... 36
7.16 Public Statements................................................ 36
7.17 ESOP............................................................. 36
7.18 Letter of Shurgard's Accountants................................. 37
7.19 Opinion of Financial Advisor..................................... 37
7.20 Notice of Certain Events......................................... 37
7.21 Director and Officer Indemnification............................. 37
7.22 Working Capital.................................................. 37
7.23 Contingent Shares................................................ 37
7.24 Further Action................................................... 38
ARTICLE 8 CONDITIONS...................................................... 38
8.1 Conditions to Each Party's Obligations........................... 38
Conditions to Obligations of Management Company to Effect the
8.2 Merger.......................................................... 40
8.3 Conditions to Obligation of Shurgard REIT to Effect the Merger... 40
ARTICLE 9 TERMINATION..................................................... 41
9.1 Termination by Mutual Consent.................................... 41
9.2 Termination by Either Shurgard REIT or Management Company........ 41
9.3 Effect of Termination and Abandonment............................ 42
ARTICLE 10 MISCELLANEOUS AND GENERAL...................................... 42
10.1 Expenses......................................................... 42
10.2 Survival......................................................... 43
10.3 Amendments, Waivers, Etc......................................... 43
10.4 No Assignment.................................................... 43
10.5 Entire Agreement................................................. 43
10.6 Specific Performance............................................. 44
10.7 Remedies Cumulative.............................................. 44
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
10.8 No Waiver........................................................ 44
10.9 No Third-Party Beneficiaries..................................... 44
10.10 Jurisdiction..................................................... 44
10.11 Governing Law.................................................... 44
10.12 Name, Captions, Etc.............................................. 44
10.13 Severability..................................................... 44
10.14 Counterparts..................................................... 45
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of December 19,
1994, by and between Shurgard Storage Centers, Inc., a Delaware corporation
("Shurgard REIT"), and Shurgard Incorporated, a Washington corporation
("Management Company").
RECITALS
WHEREAS, the respective Boards of Directors of Shurgard REIT and Management
Company have determined that it is in the best interests of their respective
stockholders and shareholders for Management Company to merge with and into
Shurgard REIT (the "Merger"), upon the terms and subject to the conditions of
this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a)(1) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the parties desire to make certain representations, warranties, and
agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
and agreements set forth herein, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Acquisition Proposal": As defined in Section 7.2.
"Adjustment Indemnification Period": As defined in Section 4.8(c).
"Adjustment Indemnification Shares": As defined in Section 4.8(c).
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
"Affiliate Letter": As defined in Section 7.8(a).
"Alex. Brown": Alex. Brown & Sons Incorporated.
"Appraised Amount": As defined in Section 4.7.
"Articles of Merger": The articles of merger with respect to the Merger
containing the provisions required by, and executed in accordance with, RCW
23B.11.050.
"Associates": As defined in Section 4.9(b).
"Audit": As defined in Section 4.1(d).
"Authorization": Any consent, approval or authorization of, expiration or
termination of any waiting period requirement (including pursuant to the HSR
Act) by, or filing, registration, qualification, declaration or designation
with, any Governmental Body.
"Barbo": Charles K. Barbo.
"Barbo Trust": Charles K. and Linda K. Barbo Trust dated December 10, 1991.
"Benefit Arrangement": As defined in Section 5.8(a).
"Benelux": Shurgard Benelux SA, a Belgian corporation.
"Benelux SCS": a Belgian Societe en Commandite Simple.
1
<PAGE>
"Buerk": Arthur W. Buerk.
"Business Combination": As defined in Section 4.1(a).
"Certificate of Merger": The certificate of merger with respect to the
Merger containing the provisions required by, and executed in accordance with,
DGCL Section 252.
"Certificates": As defined in Section 4.1(b).
"Change in Control": For purposes of this Agreement, a change in control
shall be deemed to occur on the earlier of (i) first date of public announcement
by Shurgard REIT or an Acquiring Person (as such term is defined in the Rights
Agreement) that an Acquiring Person has become such; or (ii) the first date on
which Shurgard REIT or any other Person publicly announces (a) the agreement by
Shurgard REIT to consolidate with, or merge with and into any other person (b)
the agreement of any Person to consolidate with Shurgard REIT, or merge with and
into Shurgard REIT and in connection with such merger all or part of the
Shurgard REIT Common Shares are to be changed into or exchanged for stock or
other securities of any other Person (or Shurgard REIT) or cash or any other
property, or (c) Shurgard REIT's agreement to sell or otherwise transfer, in one
or more transactions, assets or earning power aggregating 50% or more of the
assets or earning power of Shurgard REIT and its subsidiaries (taken as a whole)
to any other Person other than Shurgard REIT or one or more of its wholly-owned
subsidiaries.
"Change in Control Date": The date a Change in Control shall be deemed to
occur.
"Closing": The closing of the Merger.
"Closing Date": The date on which the Closing occurs.
"Closing Statement": As defined in Section 4.1(d).
"Closing Statement Date": As defined in Section 4.1(d).
"Code": The Internal Revenue Code of 1986, as amended.
"Contingent Amount": As defined in Section 4.7(e).
"Contingent Partnerships": As defined in Section 4.7(a).
"Contingent Share Closing Date": As defined in Section 4.7(c).
"Contingent Share Period": As defined in Section 4.7(d).
"Contingent Shares": As defined in Section 4.7(a).
"Contingent Shares Agreement": As defined in Section 4.7(g).
"DGCL": The Delaware General Corporation Law.
"Damages": "Damages" means any provable or ascertainable loss, liability,
damage, cost, obligation or expense (including reasonable costs of
investigation, defense and prosecution of litigation and attorneys' fees)
incurred by Shurgard REIT, net of any tax benefits and insurance or
indemnification recoveries (other than those received pursuant to this
Agreement) received or entitled to be received by Shurgard REIT with respect
thereto, after reasonable efforts to mitigate such loss, liability, damages,
cost, obligation or expense.
"Daniels": Donald B. Daniels.
"Deemed Distribution": As defined in Section 4.7.
"Disposition": As defined in Section 4.7(a).
"Distribution": As defined in Section 4.7(a).
"Effective Time": As defined in Section 2.3.
2
<PAGE>
"Employee Plan": As defined in Section 5.8(a).
"Employees": As defined in Section 5.8(a).
"ERISA": The Employee Retirement Income Security Act of 1974, as amended,
and all regulations promulgated thereunder, as in effect from time to time.
"ERISA Affiliates": Any trade or business, whether or not incorporated, that
is now or has at any time in the past been treated as a single employer with
Management Company or any of its Subsidiaries under Section 414(b) or (c) of the
Code and the Treasury Regulations thereunder.
"ESOP": As defined in Section 5.8(f).
"Excess Stock": As defined in the Shurgard REIT Restated Certificate of
Incorporation.
"Exchange": Either the National Association of Securities Automated
Quotations National Market or the national securities exchange (as defined in
Section 12(b) of the Exchange Act) upon which the Shurgard REIT Common Shares
are then listed for trading.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"Final Determination": (a) (i) A decision of the United States Tax Court,
which has become final and non-appealable, or (ii) a judgment, decree, or other
order by another court or other tribunal with appropriate jurisdiction, which
has become final and non-appealable; (b) a final and binding settlement or
compromise with the Internal Revenue Service or another administrative agency
with appropriate jurisdiction, including, but not limited to, a closing
agreement under Section 7121 of the Code; (c) a deficiency assessment or other
determination which is not protested or appealed by the taxpayer within the
appropriate period for protest or appeal and which therefore has become final
and non-appealable; or (d) any final disposition by reason of the expiration of
all applicable statutes of limitations.
"Final Statement": As defined in Section 4.1(d).
"Governmental Body": Any federal, state, municipal, political subdivision or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
"HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"Increase": As defined in Section 4.1(d).
"Indemnification Escrow Agent": As defined in Section 4.8(a).
"Indemnification Escrow Agreement": As defined in Section 4.8(a).
"Indemnification Period": As defined in Section 4.8(b).
"Indemnification Shares": As defined in Section 4.8(a).
"Independent Expert": As defined in Section 4.1(d).
"InterMation": InterMation, Inc., a Washington corporation and subsidiary of
Management Company.
"InterMation Spin-Off": As defined in Section 7.10.
"InterMation Spin-Off Opinion": As defined in Section 8.2(b).
"Knowledge": The term "knowledge" or "best knowledge" and any derivatives
thereof when applied to any party to this Agreement shall refer to the knowledge
which such party or any director, officer of senior manager thereof has or could
reasonably be expected to have as a result of the conduct of its business or the
performance of his or her duties in the ordinary course, but no information
known by any other employee, or any attorney, accountant or other
representative, of such party shall be imputed to such party.
3
<PAGE>
"Litigation Parties": As defined in Section 10.1.
"Majority Interest": As defined in Section 4.9.
"Management Company": Shurgard Incorporated, a Washington corporation.
"Management Company Common Stock": Common Stock, par value $.01 per share,
of Management Company.
"Management Company Disclosure Statement": The disclosure statement dated
the date of this Agreement delivered by Management Company to Shurgard REIT.
"Management Company Equity": As defined in Section 4.1(d).
"Management Company Financial Statements": As defined in Section 5.12.
"Management Company Intellectual Property Rights": All intellectual property
rights in the United States of America or abroad, including, but not limited to,
patents, patent applications, trademarks, trademark applications and
registrations, service marks, service mark applications and registrations,
tradenames, tradename applications and registrations, copyrights, copyright
applications and registrations, licenses, logos, corporate and partnership names
and customer lists, proprietary processes, formulae, inventions, trade secrets,
know-how, development tools and other proprietary rights used by Management
Company, pertaining to any product, software, system or service manufactured,
marketed, licensed, sublicensed, used or sold by Management Company in the
conduct of their business or used, employed or exploited in the development,
license, sale, marketing, distribution or maintenance thereof, and all
documentation and media constituting, describing or relating to the above,
including, but not limited to, manuals, memoranda, know-how, notebooks,
software, records and disclosures.
"Management Company Material Adverse Effect": As defined in Section 5.1.
"Management Company Option Plan": As defined in Section 4.1(c).
"Management Company Proxy Materials": As defined in Section 7.4.
"Management Company Shareholders Meeting": As defined in Section 7.3(a).
"Market Value": For purposes of this Agreement, the per-share value of
Shurgard REIT Common Shares, which shall be the average of its daily closing
price on the Exchange for each of the thirty (30) trading days on which shares
of Shurgard REIT Common Shares were traded immediately preceding (i) the Closing
Date, for purposes of the adjustment, if any, to the Share Consideration (as set
forth in Section 4.1(d) hereof), and the payment of cash, if any, in lieu of
issuance of fractional Shurgard REIT Common Shares (as set forth in Section 4.3
hereof), (ii) the last business day of the relevant fiscal quarter, for purposes
of the calculation of the Contingent Shares (as set forth in Section 4.7(a)
hereof), (iii) the Contingent Share Closing Date, for purposes of the final
calculation of Contingent Shares (as set forth in Section 4.7(b) hereof), or
(iv) the Closing Date for purposes of calculating the amount of Adjustment
Indemnification Shares or Indemnification Shares, if any, to be withheld (as set
forth in Section 4.8 hereof).
"Material Agreements": As defined in Section 515.
"Merged Plan": As defined in Section 7.17.
"Merger": The merger of Management Company with and into Shurgard REIT as
contemplated by Section 2.1.
"Minimum Working Capital": As defined in Section 7.22.
"NASD": The National Association of Securities Dealers, Inc.
"Nomura": Nomura Securities International, Inc.
4
<PAGE>
"October 31 Statement": As defined in Section 4.1(d).
"Option": As defined in Section 4.1(c).
"Over-Statement": As defined in Section 4.1(d).
"Partnerships": As defined in Section 5.2.
"Partnership Facilities": As defined in Section 4.7(a).
"Permitted Liens": As defined in Section 5.16.
"Person": Any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of any
kind.
"Profits": As defined in Section 4.7(b).
"Project Partnerships": As defined in Section 4.7(a).
"Proxy Statement/Prospectus": As defined in Section 7.4.
"Qualified Appraiser": As defined in Section 4.7(d).
"RCW": The Revised Code of Washington.
"Reduction": As defined in Section 4.1(d).
"Representatives": As defined in Section 4.9(a).
"Riddell": Riddell, Williams, Bullitt & Walkinshaw.
"Rights Agreement": The Rights Agreement dated as of March 17, 1994 between
Shurgard REIT and Gemisys Corporation, as Rights Agent.
"Rule 145 Affiliates": As defined in Section 7.8(a).
"S-4 Registration Statement": As defined in Section 7.4.
"SEC": The Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended.
"Share Consideration": As defined in Section 4.1(a).
"Shareholders Voting Agreement": As defined in Section 7.3(a).
"Shares": Collectively, the shares of Management Company Common Stock.
"Shurgard Realty Advisors": Shurgard Realty Advisors, Inc., a Washington
corporation and wholly-owned subsidiary of Management Company.
"Shurgard REIT": Shurgard Storage Centers, Inc., a Delaware corporation.
"Shurgard REIT Common Shares": Shares of Class A common stock, $0.001 par
value per share, of Shurgard REIT (including any associated purchase rights
pursuant to the Rights Agreement).
"Shurgard REIT Disclosure Statement": The disclosure statement dated the
date of this Agreement delivered by Shurgard REIT to Management Company.
"Shurgard REIT Financial Statements": The financial statements included in
the Shurgard REIT SEC Reports.
"Shurgard REIT Material Adverse Effect": As defined in Section 6.1.
"Shurgard REIT SEC Reports": As defined in Section 6.8.
"Shurgard REIT Stockholders Meeting": As defined in Section 7.3(b).
5
<PAGE>
"Special Committee": The Special Committee of independent members of the
Board of Directors of Shurgard REIT, appointed specifically for the purpose of
negotiating the terms of any proposed merger with Management Company and any
alternatives to such transaction and to make recommendations to the Shurgard
REIT Board of Directors and stockholders with respect to same.
"SRA Letter": As defined in Section 7.11.
"Subsidiary": As to any Person, any other Person of which at least 10% of
the equity or voting interests are owned, directly or indirectly, by such first
Person. Notwithstanding the foregoing, the term "Subsidiary" shall not include
InterMation, Shurgard Realty Advisors, Benelux, Benelux SCS or any Partnership.
"Surviving Corporation": The surviving corporation in the Merger.
"Tax" or "Taxes": Any federal, state, local or foreign income, excise,
sales, capital stock, license, franchise, property, use, gross receipts,
payroll, employment, windfall profits, environmental, holding, social security,
unemployment, estimated, or other tax of any kind whatsoever, including any
interest penalty in addition thereto, whether disputed or not.
"Tax Return": Any return, declaration of estimated tax, tax report, customs
declaration, claim for refund or information return relating to Taxes, including
any amendment thereto.
"Under-Statement": As defined in Section 4.1(d).
"Upper Limit": As defined in Section 4.1(d).
"WBCA": The Washington Business Corporation Act.
"1983 Agreements": The Redemption Agreement, 1983 Shareholder Agreement and
Business Agreement entered into by and between the Management Company, Barbo,
Daniels and Buerk as of July 1, 1983.
ARTICLE 2
THE MERGER; EFFECTIVE TIME; CLOSING
2.1 THE MERGER
Subject to the terms and conditions of this Agreement, at the Effective
Time, Management Company shall be merged with and into Shurgard REIT in
accordance with the provisions of the DGCL and the WBCA and with the effect
provided in Section 259 of the DGCL and RCW 23B.11.060. The separate corporate
existence of Management Company shall thereupon cease and Shurgard REIT shall be
the Surviving Corporation and shall continue to be governed by the laws of the
State of Delaware.
2.2 CLOSING
Subject to Article 9 hereof and the fulfillment or waiver of the conditions
set forth in Article 8, the Closing shall take place at (i) the offices of
Perkins Coie, 1201 Third Avenue, Seattle, Washington on March 3, 1995, or (ii)
such other place and/or time and/or on such other date as Shurgard REIT and
Management Company may agree or as may be necessary to permit the fulfillment or
waiver of the conditions set forth in Article 8.
2.3 EFFECTIVE TIME
The Merger shall become effective on the date and at the time (the
"Effective Time") that the Certificate of Merger and Articles of Merger shall
have been accepted for filing by the Secretary of State of the State of Delaware
and the Secretary of State of the State of Washington, respectively (or such
later date and time as may be specified in the Certificate of Merger and
Articles of Merger), which shall occur on the Closing Date or as soon as
practicable thereafter.
6
<PAGE>
ARTICLE 3
TERMS OF MERGER
3.1 CERTIFICATE OF INCORPORATION
The Certificate of Incorporation of Shurgard REIT as in effect immediately
prior to the Effective Time shall be the Certificate of Incorporation of the
Surviving Corporation, until duly amended in accordance with the terms thereof
and the DGCL.
3.2 BY-LAWS
The By-laws of Shurgard REIT in effect at the Effective Time shall be the
By-laws of the Surviving Corporation, until duly amended in accordance with the
terms thereof, the Certificate of Incorporation of the Surviving Corporation and
the DGCL.
3.3 DIRECTORS
As a result of the Merger, from and after the Effective Time, the directors
of the Surviving Corporation shall be the directors of Shurgard REIT immediately
prior to the Effective Time and Charles K. Barbo ("Barbo"), each to serve until
his successor has been duly elected or appointed and qualified or until his
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and By-laws.
3.4 OFFICERS
As a result of the Merger, from and after the Effective Time, the officers
of the Surviving Corporation shall be the officers of Shurgard REIT immediately
prior to the Effective Time, except that Barbo shall serve as Chairman of the
Board, President and Chief Executive Officer, Harrell L. Beck shall serve as
Senior Vice-President, Chief Financial Officer and Treasurer, and Kristin H.
Stred shall serve as Senior Vice-President, Secretary and General Counsel, each
to serve until his or her successor has been duly elected or appointed and
qualified or until his or her earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate of Incorporation and
By-laws.
ARTICLE 4
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES; ADJUSTMENTS
4.1 SHARE CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES
Subject to the provisions of this Article 4, at the Effective Time, by
virtue of the Merger and without any action by holders thereof, the Shares shall
be converted as follows:
(a) All of the Shares issued and outstanding immediately prior to the
Effective Time (other than Shares as to which dissenters' rights have been
duly exercised and are not subsequently withdrawn) shall be converted into:
(i) an aggregate of 1,400,000 Shurgard REIT Common Shares, reduced
pro rata in the proportion that the number of Shares as to which
dissenters' rights have been duly exercised and not subsequently
withdrawn bears to the number of Shares issued and outstanding
immediately prior to the Effective Time, and adjusted in accordance with
Section 4.1(d) (the "Share Consideration"), and
(ii) the right to receive Contingent Shares pro rata in the
proportion set forth in, and to be distributed in accordance with the
terms of, Section 4.7. The right to receive Contingent Shares shall be
nonassignable except by operation of law or by will.
The Share Consideration shall, subject to Section 4.8, be distributed
pro rata to the Management Company shareholders in the proportion that the
number of Shares issued and outstanding in the name of a Management Company
shareholder immediately prior to the Effective Time bears to the total
number of Shares issued and outstanding immediately prior to the Effective
Time. If, prior to the Effective Time, Shurgard REIT should split or combine
the Shurgard REIT
7
<PAGE>
Common Shares, or pay a stock dividend or other stock distribution in
Shurgard REIT Common Shares, or otherwise change the Shurgard REIT Common
Shares into, or exchange Shurgard REIT Common Shares for, any other
securities (whether pursuant to or as part of a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation
of Shurgard REIT as a result of which the Shurgard REIT stockholders receive
cash, stock or other property in exchange for, or in connection with, their
Shurgard REIT Common Shares (a "Business Combination")), or make any other
dividend or distribution on the Shurgard REIT Common Shares, then the Share
Consideration will be appropriately adjusted to reflect such split,
combination, dividend, distribution, Business Combination or change.
(b) All Shares to be converted into Shurgard REIT Common Shares pursuant
to this Section 4.1 shall cease to be outstanding, shall be cancelled and
retired and shall cease to exist, and each holder of a certificate or
certificates representing any such Shares (the "Certificates") shall
thereafter cease to have any rights with respect to such Shares, except the
right to receive for each of the Shares, upon the surrender of such
Certificate in accordance with Section 4.2, the Shurgard REIT Common Shares
specified above, the right to Contingent Shares (and cash in lieu of
fractional Contingent Shares) as contemplated by Section 4.7, and cash in
lieu of fractional Shurgard REIT Common Shares as contemplated by Section
4.3 (in each case subject to the provisions of Section 4.8).
(c) The Management Company shall take all requisite action so that, by
their terms, all options (individually an "Option" and collectively, the
"Options") to purchase Shares outstanding at the Effective Time which were
issued pursuant to Management Company's Amended and Restated Stock Option
Plan (the "Management Company Option Plan") shall terminate.
(d) The Share Consideration shall be calculated and subject to
adjustment as follows:
(i) First, in the event that, as of the Closing Date, the product
obtained by multiplying the Share Consideration by the then Market Value
shall equal or exceed $31,165,000 (such dollar number, the "Upper
Limit"), the Share Consideration shall be adjusted and reduced to that
number of Shurgard REIT Common Shares obtained by dividing the Upper
Limit by the Market Value as of the Closing Date.
(ii) Following any adjustment to the Share Consideration as set forth
in subsection (d)(i) above, the Share Consideration shall be subject to
further adjustment, as follows:
(A) Within five (5) days prior to the Closing Date, Management
Company will deliver to Shurgard REIT a statement of assets and
liabilities of the Management Company (the "Closing Statement") dated
as of the Closing Date or a date within five (5) days prior to the
Closing Date (the "Closing Statement Date"), prepared in a manner
consistent with the accounting methodology described in Section
5.12(b) and the accounting methodology described in the statement of
assets and liabilities of the Management Company dated October 31,
1994 (the "October 31 Statement"), attached hereto as Exhibit A.
(B) In the event that there has been a reduction in Management
Company Equity as set forth in the Closing Statement when compared to
Management Company Equity as set forth in the October 31 Statement (a
"Reduction"), the Share Consideration shall be reduced by the
quotient obtained by dividing such Reduction by the Market Value as
of the Closing Date. In the event there has been an increase in
Management Company Equity as set forth in the Closing Statement when
compared to the October 31 Statement (an "Increase"), subject to the
following sentence, the Share Consideration shall be increased by the
quotient obtained by dividing such Increase by the Market Value as of
the Closing Date. Notwithstanding the foregoing (1) any adjustment to
the Share Consideration resulting from an Increase shall be limited
in amount to $1,500,000 and
8
<PAGE>
(2) in calculating the amount of any Increase, solely for purposes of
this sentence, any Shurgard REIT Common Shares held by Management
Company as of the Closing Date shall not be included in the
calculation of the $1,500,000 limitation.
(C) Within thirty (30) days following the Closing Date, the
former directors and officers of Management Company shall cause
Deloitte & Touche, LLP to audit (at Shurgard REIT's sole expense)
such Closing Statement (the "Audit") and deliver the revised and
audited Closing Statement (the "Final Statement") to the
Representatives (as defined below) and Shurgard REIT. The Final
Statement shall be prepared in prepared in a manner consistent with
the methodology described in Section 5.12(b) and the accounting
methodology described in the October 31 Statement.
(D) In the event that the Final Statement reflects Management
Company Equity in an amount less than that reflected on the Closing
Statement (an "Over-Statement"), subject to subsection (E) below, the
amount of such Over-Statement shall be deemed conclusively to
constitute Damages for purposes of Section 4.8 hereof and Shurgard
REIT shall be entitled to recover from the Adjustment Indemnification
Shares (as defined below) and, to the extent necessary, the
Indemnification Shares, that number of Adjustment Indemnification
Shares or Indemnification Shares, as the case may be, determined by
dividing the Over-Statement by the Market Value as of the Closing
Date, in accordance with the provisions of Section 4.8 and the
Indemnification Escrow Agreement (as defined below). In the event
that the Final Statement reflects Management Company Equity in an
amount greater than that reflected on the Closing Statement (an
"Under-Statement"), subject to subsection (E) below, Shurgard REIT
shall promptly issue such number of additional Shurgard REIT Common
Shares to the Management Company shareholders obtained by dividing
such Under-Statement by the Market Value as of the Closing Date. Such
additional shares shall be distributed pro rata in proportion that
the number of Shares formerly held by a Management Company
shareholder immediately prior to the Effective Time bears to the
total number of Shares issued and outstanding immediately prior to
the Effective Time (other than Shares as to which dissenters' rights
have been duly exercised and not subsequently withdrawn).
(E) In the event that either party hereto shall dispute the
results of the Audit, such party (in the case of Management Company,
acting through the Representatives) may, within ten (10) days
following receipt of the Final Statement, engage such firm of
certified public accountants (the "Independent Expert") as selected
by Deloitte & Touche, LLP. The costs and expenses of such Independent
Expert shall be borne by Shurgard REIT. The Independent Expert shall
perform an audit of the Closing Statement (independent of the Audit)
and shall deliver its audited Closing Statement to Shurgard REIT and
the Representatives no later than thirty (30) days following
appointment. The decision of the Independent Expert shall be final
and binding upon the parties.
(F) For purposes of this Agreement and this Section 4.1(d),
"Management Company Equity" shall mean the consolidated stockholders
equity of Management Company and its consolidated subsidiaries as of
the close of business on the relevant statement date prepared in a
manner consistent with the methodology described in Section 5.12(b)
and the accounting methodology described in the October 31 Statement.
4.2 PAYMENT FOR SHARES IN THE MERGER
Shurgard REIT shall deliver to each holder of record of a Certificate or
Certificates (a) a form of letter of transmittal (which shall provide
acknowledgement that (i) the Representatives are authorized to act on behalf of
the Management Company shareholders with respect to the Agreement, the
Indemnification Escrow Agreement and the Contingent Shares Agreement (as defined
below) as set forth in Section 4.9 hereof, (ii) such shareholder agrees to be
bound by the personal indemnification under Section 4.8(b) and (iii) delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to Shurgard REIT at the Closing)
and
9
<PAGE>
(b) instructions for use in effecting the surrender of the Certificates for
payment therefor. Except as provided in Section 4.8 below, at or after the
Effective Time, upon surrender of Certificates for cancellation to Shurgard
REIT, together with such letter of transmittal duly executed and any other
required documents, the holder of such Certificates shall receive for each of
the Shares represented by such Certificates (i) his, her or its pro rata portion
of the Share Consideration, (ii) the right to receive Contingent Shares and cash
in lieu of fractional Contingent Shares as contemplated by Section 4.7, and
(iii) cash in lieu of fractional Shurgard REIT Common Shares as contemplated by
Section 4.3, and the Certificates so surrendered shall forthwith be canceled.
Until surrendered, each outstanding Certificate shall, upon and after the
Effective Time, be deemed for all purposes (other than to the extent provided in
the following sentence) to evidence ownership of the number of shares of
Shurgard REIT Common Shares into which such Shares have been converted pursuant
to Section 4.1 hereof and the other rights contemplated in the preceding
sentence. Unless and until such outstanding Certificates are so surrendered, the
holders thereof shall not be entitled to receive any dividends or distributions
of any kind payable to the holders of record of Shurgard REIT Common Shares.
Upon the surrender of any such Certificate, however, there shall be paid to the
record holder thereof the aggregate amount of dividends and distributions, if
any, which theretofore became payable in respect of the Shurgard REIT Common
Shares into which the Shares represented by such Certificate have been
converted, and such surrendered Certificate shall be duly cancelled. No interest
shall be payable on or in respect of such deferred dividends or distributions
until surrender of such outstanding Certificates.
4.3 FRACTIONAL SHARES
No fractional Shurgard REIT Common Shares shall be issued in the Merger. In
lieu of any such fractional securities, each holder of Shares who would
otherwise have been entitled to a fraction of a Shurgard REIT Common Share upon
surrender of Certificates for exchange pursuant to this Article 4 will be paid
an amount in cash (without interest) equal to the Market Value of one Shurgard
REIT Common Share as of the Closing Date, multiplied by such fraction.
4.4 TRANSFER OF SHARES AFTER THE EFFECTIVE TIME
No transfers of Shares shall be made on the stock transfer books of
Management Company after the close of business on the day prior to the date of
the Effective Time.
4.5 LOST, STOLEN OR DESTROYED CERTIFICATES
In the event any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the Person claiming such Certificate
to be lost, stolen or destroyed and, if required by the Surviving Corporation,
the posting of such Person of a bond in such reasonable amount as the Surviving
Corporation may direct as indemnity against any claim that may be made against
it with respect to such Certificate, the Surviving Corporation will issue in
exchange for such lost, stolen or destroyed Certificate Shurgard REIT Common
Shares, cash in lieu of fractional shares, and unpaid dividends and
distributions on shares of Shurgard REIT Common Shares as provided in Section
4.2, deliverable in respect thereof pursuant to this Agreement.
4.6 DISSENTERS' RIGHTS
Notwithstanding anything in this Agreement to the contrary, Shares which are
issued and outstanding immediately prior to the Effective Time and which are
held by holders of record of such Shares who have properly exercised dissenters'
rights with respect thereto in accordance with RCW 23B.13.010 ET SEQ. shall not
be converted into or be exchangeable for the right to receive the consideration
paid in the Merger, and holders of such Shares shall be entitled to receive
payment of the fair value of such Shares in accordance with the provisions of
the WBCA unless and until such holders fail to perfect or shall have effectively
withdrawn or lost their rights to receive fair value under the WBCA. If, after
the Effective Time, any such holder fails to perfect or shall have effectively
withdrawn or lost such right, such Shares shall thereupon be treated as if they
had been converted into and become exchangeable for, at the Effective Time, the
right to receive consideration paid in the Merger to which the holder of such
Shares is entitled (including that portion of the Share Consideration and right
to receive Contingent Shares as determined pursuant to Section 4.1(a) hereof),
without any interest thereon. Management Company shall give Shurgard REIT prompt
notice of any demands
10
<PAGE>
received by Management Company for the receipt of fair value for Shares and,
prior to the Effective Time, Shurgard REIT shall have the right to participate
in all negotiations and proceedings with respect to such demands. Prior to the
Effective Time, Management Company shall not, except with the prior written
consent of Shurgard REIT, make any payment with respect to, or settle or offer
to settle, any such demands.
4.7 ADDITIONAL CONSIDERATION
(a) As set forth in Section 4.1(a)(ii), in addition to the Share
Consideration, the Management Company shareholders will receive additional
consideration in the form of contingent shares ("Contingent Shares") to be
issued by the Shurgard REIT based on the Profits (as calculated below), if any,
received by the Shurgard REIT from its interests in certain limited partnerships
set forth in the Management Company Disclosure Statement (the "Contingent
Partnerships"). The Contingent Partnerships own either self-storage centers (the
"Partnership Facilities") or direct or indirect interests (through one or more
tiers of partnership entities) in several limited and general partnerships as
set forth in the Management Company Disclosure Statement (the "Project
Partnerships") that themselves own Partnership Facilities. Contingent Shares
shall be issued pursuant to the terms of this Section 4.7 by the Shurgard REIT
to the Management Company shareholders based on Profits (as calculated below)
realized by Shurgard REIT as a result of any of the following events: (i) the
receipt of proceeds by the Shurgard REIT from the sale or other disposition by
the Shurgard REIT of all or any part of its interest in the Contingent
Partnerships (a "Disposition"); (ii) the receipt by the Shurgard REIT of any
distribution from any Contingent Partnership attributable either to the sale,
refinancing, liquidation or other disposition by a Contingent Partnership or a
Project Partnership of one or more of its Partnership Facilities or to the sale
by a Contingent Partnership (or by any Project Partnership that is itself an
owner of an interest in a Project Partnership) of all or any part of its
interest in a Project Partnership (a "Distribution"); or (iii) a deemed
liquidating distribution from the Contingent Partnership to the Shurgard REIT as
described in Section 4.7(d) (as defined therein a "Deemed Distribution"). The
jurisdiction of organization and description of the equity interests held by the
Management Company with respect to each Contingent Partnership and Project
Partnership is as set forth in the Management Company Disclosure Statement.
(b) Profits ("Profits") with respect to the Contingent Partnerships shall be
calculated as follows:
(i) The Profits pursuant to a Disposition shall consist of the gross
proceeds received by Shurgard REIT from such Disposition, net of the
carrying value of the respective Contingent Partnership interest on the
Final Statement and Shurgard REIT's reasonable costs and legal and
accounting expenses incurred in connection with such Disposition, provided
that, in the event of a Disposition to an Affiliate of the Shurgard REIT,
the gross proceeds received by Shurgard REIT, for purposes of calculating
Profits, will be deemed to be the greater of (x) the portion of the
Appraised Amount (as established in accordance with Subsection 4.7(d)) that
would have been distributed to the Shurgard REIT had there been a Deemed
Distribution as of the date of such Disposition, or (y) the actual gross
proceeds received by Shurgard REIT with respect to such Disposition.
(ii) The Profits received upon a Distribution shall be calculated with
reference to the amounts actually received by Shurgard REIT with respect to
such Distribution, provided that in the event a Partnership Facility, or
interest in a Project Partnership is acquired directly by the Shurgard REIT
or an Affiliate thereof, the amount received by Shurgard REIT for purposes
of calculating Profits will be deemed to be the greater of (x) the portion
of the Appraised Amount (as established in accordance with subsection
4.7(d)) that would have been distributed to the Shurgard REIT had there been
a Deemed Distribution as of the date of such acquisition; (y) the actual
amount received by the Shurgard REIT with respect to such Distribution or
(z) the amount of any credit towards the purchase price for the Partnership
Facility afforded the Shurgard REIT in exchange for cancellation of its
interest in the Contingent Partnership.
11
<PAGE>
(iii) The Profits received upon a Deemed Distribution shall be calculated
with reference to the amounts Shurgard REIT would have received pursuant to
the terms of the respective Contingent Partnership agreement had such
Contingent Partnership and the Project Partnership, if any, in which such
Contingent Partnership may hold an interest, liquidated the Partnership
Facilities for the Appraised Amount, as described below, less reasonable
costs and legal, accounting and appraisal expenses incurred pursuant to and
as provided in Section 4.7(d).
(c) The number (if any) of Contingent Shares to be issued by Shurgard REIT
pursuant to this Section 4.7 shall be determined for each fiscal quarter ending
after the Effective Time through and including the fifth anniversary of the
Effective Time (the "Contingent Share Closing Date"), as follows:
(i) The Contingent Amount (as defined below), if any, shall be computed
as promptly as practicable but in no event later than forty-five (45) days
after the end of each fiscal quarter;
(ii) The number of Contingent Shares, if any, to be issued for each
fiscal quarter shall be determined by dividing the Contingent Amount by the
Market Value as of the last business day of such fiscal quarter.
(iii) The number of Contingent Shares so determined shall be issued pro
rata to the holders of rights to Contingent Shares in the proportion that
the number of Shares issued and outstanding in the name of a Management
Company shareholder immediately prior to the Effective Time bears to the
total number of Shares issued and outstanding immediately prior to the
Effective Time.
(iv) No fractional Contingent Shares shall be issued. In lieu of any
such fractional securities, each holder of rights to Contingent Shares who
would otherwise have been entitled to a fraction of a Contingent Share will
be paid an amount in cash (without interest) equal to the Market Value (as
calculated above), multiplied by such fraction.
(v) The Contingent Shares shall be issued by Shurgard REIT to the
holders of the right to receive Contingent Shares as promptly as practicable
but in no event later than forty-five (45) days after (1) the close of each
of Shurgard REIT's fiscal quarters during the Contingent Share Period (as
defined in Section 4.7(d) below), (2) the final resolution of a disputed
Profit (which dispute shall be settled by the procedures set forth in the
Contingent Shares Agreement (as defined below), or, (3) in the event of a
Distribution or Deemed Distribution to the Shurgard REIT or an Affiliate
thereof, the determination of the Appraised Amount, whichever is later.
(vi) All distributions or other payments, to the extent such
distributions or other payments do not constitute a Distribution, and all
voting rights and other indicia of beneficial ownership with respect to the
Contingent Partnerships shall inure to the benefit of Shurgard REIT.
Dividends or other distributions and all voting rights and other indicia of
beneficial ownership with respect to Contingent Shares shall inure to the
benefit of the former Management Company shareholders only when and from the
time that such Contingent Shares are issued or are required to be issued, if
ever, in accordance with the provisions of this Section 4.7.
(d) The period during which Contingent Shares may be earned shall begin at
the Effective Time and shall continue through the Contingent Share Closing Date
(the "Contingent Share Period"). To the extent that (1) a Change in Control of
the Shurgard REIT shall occur at any time during the Contingent Share Period, or
(2) the Shurgard REIT shall continue to hold, at the Contingent Share Closing
Date, any residual interest in any of the Contingent Partnerships, the Project
Partnerships, in which such Contingent Partnerships continue to hold interests,
and any Contingent Partnership owning Partnership Facilities shall be deemed to
have sold all of their Partnership Facilities for the Appraised Amount (as
defined below) and to have distributed the Appraised Amount in liquidation of
the Project Partnerships or the Contingent Partnerships, as the case may be,
pursuant to the terms of their respective partnership agreement. Any portion of
the Appraised Amounts deemed to have been
12
<PAGE>
received by the Contingent Partnerships shall be deemed to have been distributed
(the "Deemed Distribution") to the Shurgard REIT pursuant to the terms of the
Contingent Partnership's partnership agreement.
(i) Pursuant to this Section 4.7(d), the parties hereto agree to submit
for appraisal the valuation of the Partnership Facilities (the "Appraised
Amount") by an independent appraiser with self-storage industry valuation
experience (a "Qualified Appraiser") and mutually acceptable to and
appointed by Shurgard REIT and the Representatives within thirty (30) days
after the Change in Control Date or the Contingent Share Closing Date, as
the case may be.
(ii) If Shurgard REIT and the Representatives cannot agree on a
Qualified Appraiser within such period, the Appraised Amount shall be
determined jointly by a Qualified Appraiser appointed by Shurgard REIT and a
Qualified Appraiser appointed by the Representatives, each to be appointed
within such thirty (30) day period. Such Qualified Appraisers shall complete
their respective valuations within forty-five (45) days of their
appointment. If the higher of the values determined by either of the initial
Qualified Appraisers is not in excess of 115% of the value determined by the
other Qualified Appraiser, the initial Qualified Appraisers shall be deemed
to have agreed upon a value equal to the average of the two determinations.
If the higher of the values determined by either of the initial Qualified
Appraisers exceeds 115% of the value determined by the other Qualified
Appraiser, such Qualified Appraisers shall (within 60 days after their
appointment) select a third Qualified Appraiser who shall determine (within
45 days after his or her appointment) the Appraised Amount for the purposes
hereof by arriving at a valuation either equal to that determined by one of
the initial two Qualified Appraisers or intermediate between such two
initial valuations. If the two initial Qualified Appraisers are unable to
agree upon a third appraiser, he or she shall be selected by the presiding
judge of the Superior Court for King County, Washington.
(iii) Shurgard REIT shall bear the cost and expense of any appraisals,
provided, however, that Shurgard REIT shall be entitled to include the cost
of any Qualified Appraiser appointed by the Representatives, and one-half
the cost of the initial and third Qualified Appraiser (if any), as an
expense for purposes of calculating Profits pursuant to 4.7(b)(iii).
(iv) The Appraised Amount, as determined by the Qualified Appraiser(s)
pursuant to this Section 4.7, shall be final and binding on all the parties.
(v) The number of Contingent Shares to be issued as a result of any such
valuation shall be determined by dividing the amount of the Contingent
Amount computed thereby by the Market Value as of the Contingent Share
Closing Date or Change in Control Date, as the case may be, and such
Contingent Shares (and cash in lieu of fractional shares) shall be issued to
the holders of the right to receive Contingent Shares as set forth in
subsections (c)(iii) and (c)(iv) above as promptly as practicable but in no
event later than twenty (20) days after the close of business on the day
such Appraised Amount is determined.
(e) For purposes of this Agreement and this Section 4.7, the "Contingent
Amount" shall be equal to the product obtained by multiplying the dollar amount
of Profits by .95.
(f) The number of Contingent Shares to be issued to the Management Company
shareholders hereunder shall be reduced by that number of Contingent Shares
having an aggregate Market Value equal to the reasonable expenses incurred by
the Representatives in carrying out their obligations hereunder. Such Contingent
Shares shall be issued to the Representatives as reimbursement for such
expenses.
(g) The foregoing shall be reflected in an agreement (the "Contingent Shares
Agreement"), substantially in the form attached hereto as Exhibit B, to be
entered into by Shurgard REIT and the Representatives on or prior to the Closing
Date.
13
<PAGE>
(h) The Management Company shareholders shall, by virtue of their collective
approval of this Agreement, be deemed to have agreed to, and be bound by, the
terms of the Contingent Shares Agreement.
4.8 INDEMNIFICATION SHARES; CLAIMS AGAINST THE ESCROW
(a) At the Closing, ten percent (10%) of the shares received as part of the
Share Consideration (net of any Shurgard REIT Common Shares held by Management
Company as of the Closing Date (the "Indemnification Shares"), shall be
deposited in escrow with Seattle First National Bank, as escrow agent, or such
other party as may be agreed upon by the parties prior to Closing (the
"Indemnification Escrow Agent"), to be held and administered in accordance with
the terms and conditions of an Indemnification Escrow Agreement, substantially
in the form attached hereto as Exhibit C (the "Indemnification Escrow
Agreement"). The Indemnification Shares shall be deducted pro rata from that
portion of the Share Consideration, as adjusted, otherwise issuable to each of
the Management Company shareholders. Fractional Shurgard REIT Common Shares
shall not be deposited in escrow. In lieu thereof, each Management Company
shareholder shall round up such fractional share to the nearest whole number and
deposit in escrow an additional Shurgard REIT Common Share. The Indemnification
Shares shall be registered in the name of the respective Management Company
shareholders and shall be accompanied by stock powers endorsed in blank.
Shurgard REIT shall be entitled to recover from the Indemnification Shares
the full dollar amount of any Damages that may be suffered by Shurgard REIT by
reason of (i) any breach of representation or warranty made by Management
Company in Article 5, (ii) any breach by Management Company of any covenant or
agreement on its part contained in this Agreement, (iii) any liability for Taxes
assessed against Shurgard REIT (including penalties and interest) as successor
to Management Company (irrespective of which party is primarily or solely liable
under the laws of the applicable taxing authority) resulting from a
determination by an applicable taxing authority that the InterMation Spin-Off
does not qualify under Section 355(a)(1) of the Code; (iv) any Over-Statement in
the amount of Management Company Equity reflected in the Final Statement as
compared with the Closing Statement (including any overstatement of any Tax
refund due Management Company as a result of its short taxable year ending as of
the Effective Time (the "Refund")), subject to Section 4.1(d)(ii)(E); or (v) any
liability or out-of-pocket expenses suffered by Shurgard REIT in its capacity as
general partner of any of the Partnerships to the extent such liability or
expense arises out of facts or circumstances (other than the legal status as a
general partner) in existence prior to the Closing Date (provided, however, that
such liabilities or expenses shall be calculated net of distributions received
by Shurgard REIT from such Partnership which are not included in the calculation
of Profits under Section 4.7). No claims for indemnification hereunder shall be
made by Shurgard REIT until Damages (arising from a single claim or in the
aggregate from multiple claims) equal or exceed $50,000, in which case the full
dollar amount of any Damages shall be recoverable. Notwithstanding the
foregoing, Shurgard REIT shall not be entitled to indemnification or to seek
Damages for any (x) liability with respect to which Shurgard REIT would have
been obligated to indemnify Shurgard, if such liability had arisen prior to the
Effective Time, or (y) Tax liabilities resulting from or arising in connection
with the transactions effected by this Agreement (except as specifically set
forth in subsection (a)(iii) hereof).
(b) For purposes of this Section 4.8, the "Indemnification Period" shall
begin as of the Closing Date and shall continue through the third anniversary
thereof. The period during which claims may be made from the Indemnification
Shares for Damages shall begin as of the Closing Date and shall continue through
the second anniversary of the Closing Date except with respect to (i) any tax
liability assessed against Shurgard REIT (including penalties and interest) as
successor to Management Company if the InterMation Spin Off does not qualify
under Section 355 of the Code, (ii) any breach of representation or warranty
made by Management Company in Sections 5.8 or 5.10, or (iii) any breach of
covenant made by Management Company in Section 7.10 or 7.17, which shall
continue for the full term of the Indemnification Period. Nevertheless, any
covenant, agreement, representation or warranty in respect of which indemnity
may be sought pursuant to this Section 4.8 shall survive the time
14
<PAGE>
at which it would otherwise terminate if written notice of the inaccuracy or
breach thereof specifying the Damages (including the amount thereof) giving rise
to such right to indemnity shall have been delivered to the Representatives
prior to such time.
At the termination of the Indemnification Period, Indemnification Shares not
required to reimburse Shurgard REIT for any Damages which constitute an
indemnifiable claim, or which are not pending determination as an
indemnification claim, shall be returned by the Indemnification Escrow Agent to
the Management Company shareholders, pro rata in the same proportion as
originally deducted from the portion of the Share Consideration otherwise
issuable to each Management Company shareholder. Notwithstanding the foregoing,
Shurgard REIT shall be entitled to continuing indemnification from the
Management Company shareholders, personally and severally (not jointly), pro
rata in the same proportion as Indemnification Shares originally were deducted
from the portion of the Share Consideration otherwise issuable to each
Management Company shareholder, with respect to the matters set forth in
subsections (a)(iii) above, which indemnification obligation shall continue
until the expiration of the applicable statutory period of limitations. Such
continuing right to indemnification beyond the Indemnification Period shall be
limited to the recovery of Damages, in the aggregate, in an amount equal to the
product obtained by multiplying the number of Indemnification Shares returned to
the Management Company shareholders by the Market Value of the Shurgard REIT
Common Shares as of the Closing Date.
(c) At the Closing, an additional five percent (5%) of the shares received
as part of the Share Consideration (net of any Shurgard REIT Common Shares held
by Management Company as of the Closing Date (the "Adjustment Indemnification
Shares") shall be deposited with the Indemnification Escrow Agent to be held and
administered in accordance with the terms and conditions of the Indemnification
Escrow Agreement. The Adjustment Indemnification Shares shall be deducted pro
rata from that portion of the Share Consideration, as adjusted, otherwise
issuable to each of the Management Company shareholders. Fractional Shurgard
REIT Common Shares shall not be deposited in escrow. In lieu thereof, each
Management Company shareholder shall round up such fractional share to the
nearest whole number and deposit in escrow an additional Shurgard REIT Common
Share. The Adjustment Indemnification Shares shall be registered in the name of
the respective Management Company shareholders and shall be accompanied by stock
powers endorsed in blank. Shurgard REIT's only rights with respect to the
Adjustment Indemnification Shares shall be to recover from the Adjustment
Indemnification Shares (i) the full dollar amount of any Over-Statement in the
amount of Management Company Equity reflected in the Final Statement as compared
with the Closing Statement, subject to Section 4.1(d)(ii)(E), and (ii) the
difference between the dollar amount of any Refund claimed as set forth in the
Closing Statement and the actual amount received by the Shurgard REIT. Any
amount defined in subsection (c)(i) and (ii) hereof over and above the value of
the Adjustment Indemnification Shares (as calculated above) shall be deemed
conclusively to constitute Damages for purposes of subsection (a) hereof and
Shurgard REIT shall be entitled to recover from the Indemnification Shares the
full dollar amount calculated by subtracting from the dollar value of such
Damages the value of the Adjustment Indemnification Shares, as calculated in
subsection (a) hereof. The indemnification period with respect to the Adjustment
Indemnification Shares shall begin as of the Closing Date and shall continue for
a period lasting ten (10) days following the later of (i) delivery to the
Representatives and Shurgard REIT of the Final Statement or, if an Independent
Expert is appointed, upon delivery to the Representatives and Shurgard REIT of
its report and (ii) the date on which the Refund is received by the Shurgard
REIT or the date on which the Shurgard REIT receives notice that the Refund will
not be paid (the "Adjustment Indemnification Period"). At the termination of the
Adjustment Indemnification Period, Adjustment Indemnification Shares (x) not
required to reimburse Shurgard REIT for any Over-Statement; (y) not required to
reimburse Shurgard REIT for any difference between the Refund actually received
and the amount of the Refund as set forth on the Final Statement; and (z) which
are not pending determination as an indemnification claim shall be returned by
the Indemnification Escrow Agent to the Management Company shareholders, pro
rata in the same proportion as originally deducted from the portion of the Share
Consideration otherwise issuable to each Management Company shareholder.
15
<PAGE>
(d) Notwithstanding the escrow of the Adjustment Indemnification Shares and
Indemnification Shares, dividends or other distributions declared and paid on
such shares shall continue to be paid by Shurgard REIT to the Management Company
shareholders and all voting rights with respect to such shares shall inure to
the benefit of and be enjoyed by the Management Company shareholders. Any
securities received by the Indemnification Escrow Agent in respect of any
Adjustment Indemnification Shares or Indemnification Shares held in escrow as a
result of stock split or combination of Shurgard REIT Common Shares, payment of
a stock dividend or other stock distribution in or on Shurgard REIT Common
Shares, or change of Shurgard REIT Common Shares into any other securities
pursuant to or as part of a Business Combination or otherwise, shall be held by
the Indemnification Escrow Agent as, and shall be included within the definition
of, Adjustment Indemnification Shares or Indemnification Shares, as the case may
be. Indemnification procedures shall be as stipulated in the Indemnification
Escrow Agreement.
(e) For purposes of this Section 4.8, the satisfaction of any Damages owed
hereunder shall be made by delivery by the Indemnification Escrow Agent to
Shurgard REIT of that number of Indemnification Shares calculated by dividing
the dollar amount of any Damages by the Market Value as of the Closing Date. Any
Adjustment Indemnification Shares or Indemnification Shares, as the case may be,
returned to Shurgard REIT hereunder shall be treated, to the extent permitted by
law, by the Management Company shareholders and Shurgard REIT as a purchase
price adjustment. The number of Indemnification Shares to be released to the
Management Company shareholders at the termination of the Indemnification Period
shall be reduced by the number of Indemnification Shares having an aggregate
Market Value equal to the reasonable expenses incurred by the Representatives in
carrying out their obligations hereunder. Such Indemnification Shares shall be
released to the Representatives as reimbursement for such expenses.
(f) The Management Company shareholders shall, by virtue of their collective
approval of this Agreement, be deemed to have agreed to, and be bound by, the
terms of the Indemnification Escrow Agreement.
4.9 APPOINTMENT OF SHAREHOLDERS' REPRESENTATIVES
(a) (i) The Management Company shareholders hereby appoint and authorize
Barbo, Donald B. Daniels ("Daniels") and Arthur W. Buerk ("Buerk") (the
"Representatives") as their agents to deal with Shurgard REIT on behalf of the
Management Company shareholders regarding all matters arising under this
Agreement, the Contingent Shares Agreement and the Indemnification Escrow
Agreement.
(ii) Unless and until Shurgard REIT and the Indemnification Escrow Agent
shall have received a written revocation of such appointment signed by
Management Company shareholders who received a majority of the Share
Consideration in the Merger (a "Majority Interest"), together with a written
appointment of successor Representatives for the Management Company
shareholders, Shurgard REIT and the Indemnification Escrow Agent shall be
entitled to rely upon, and shall be fully protected in relying upon, the
power and authority of the Representatives to act on behalf of the
Management Company shareholders.
(iii) If any of the Representatives or any successor shall die, refuse
or become unable to act, resign or otherwise terminate his or her status as
one of the Representatives, a replacement shall promptly be appointed by a
writing signed by Management Company shareholders holding a Majority
Interest, and Shurgard REIT and the Indemnification Escrow Agent shall be
notified of such appointment forthwith. If a replacement shall not be
appointed within thirty (30) days of a Representative's termination of his
or her status as a Representative, Shurgard REIT and the Indemnification
Escrow Agent shall be authorized to act upon written instructions received
from the remaining Representatives until such time as a replacement shall be
appointed.
(b) (i) By virtue of their collective approval of this Agreement, each of
the Management Company shareholders shall be deemed to agree that the
Representatives, acting by majority vote, (1) have
16
<PAGE>
full power and authority to take such action on behalf of the Management Company
shareholders with respect to the Contingent Shares, the Adjustment
Indemnification Shares and the Indemnification Shares as the Representatives in
their sole discretion may determine and (2) shall represent the Management
Company shareholders for all purposes of this Agreement, including the receipt
of notices and the exercise of any rights with respect to Shurgard REIT's
obligations under this Agreement, the Contingent Shares Agreement and the
Indemnification Escrow Agreement and the modification or amendment of the terms
of such agreements and the waiver of conditions, and resolution of disputes or
uncertainties arising thereunder. The Management Company shareholders, by virtue
of their collective approval of this Agreement, also shall be deemed to agree
that such Management Company shareholder shall be bound by all decisions of the
Representatives pursuant to the authority granted hereunder, and that, except as
set forth in subsection (a) hereof, such authority may not be revoked during the
term of this Agreement.
(ii) The Representatives, acting by majority vote, shall have sole
discretion with respect to the administration of the distribution of the
Contingent Shares, Indemnification Shares and Adjustment Indemnification
Shares and shall discharge their duties in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances and in a manner the Representatives reasonably believe to be
in the best interests of the Shurgard shareholders.
(iii) None of the Representatives nor any of their respective employees,
employers, partners, or agents, or any corporation of which he or she is an
officer, director, or agent (collectively, "Associates") shall be liable for
any action taken or not taken in connection herewith in his or her capacity
as Representative (whether or not pursuant to this Agreement) in the absence
of his or her own gross negligence, bad faith or willful misconduct.
(iv) None of the Representatives nor any of his or her respective
Associates shall be responsible for or have any duty to ascertain, inquire
into, or verify, in his or her capacity as Representative (1) any statement,
warranty, or representation made in connection with this Agreement (2) the
performance or observance of any of the covenants or agreements pursuant to
this Agreement or (3) the validity, effectiveness, or genuineness of this
Agreement or any other instrument or writing furnished in connection with
this Agreement. None of the Representatives nor any of his or her Associates
shall incur any liability by reason of such Representative having acted
pursuant to this Agreement in reliance upon any oral or written request,
notice, consent, certificate, statement, or other writing (which may be a
facsimile transmission, telex, or similar writing) reasonably believed by
such Representative to be genuine or signed by the proper party or parties.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF MANAGEMENT COMPANY
Except as set forth on the Management Company Disclosure Statement,
Management Company hereby represents and warrants to Shurgard REIT that as of
the date hereof:
5.1 ORGANIZATION, ETC. OF MANAGEMENT COMPANY
Management Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Washington and has all requisite
corporate power and authority to own, lease and operate its properties, to carry
on its business as now conducted and proposed by Management Company to be
conducted, to enter into this Agreement and to carry out the provisions of this
Agreement and consummate the transactions contemplated hereby. Management
Company is duly qualified and in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification necessary and where the failure to be so
qualified has or would be reasonably expected (so far as can be foreseen at the
time) to
17
<PAGE>
have a material adverse effect on the business, properties, operations,
condition (financial or other) or prospects of Management Company (taking into
account any tax, insurance or indemnification benefits received or to be
received) (a "Management Company Material Adverse Effect").
Management Company has obtained from the appropriate Governmental Bodies all
approvals and licenses necessary for the conduct of its business and operations
as currently conducted, which approvals and licenses are valid and remain in
full force and effect, except where the failure to have obtained such approvals
or licenses or the failure of such licenses and approvals to be valid and in
full force and effect does not have and would not be reasonably expected (so far
as can be foreseen at the time) to have a Management Company Material Adverse
Effect. Management Company's Articles of Incorporation and Bylaws are listed in
the Management Company Disclosure Statement, and true and correct copies of such
documents have been made available to Shurgard REIT.
5.2 PARTNERSHIPS; SUBSIDIARIES
The Management Company Disclosure Statement sets forth a true and complete
list, including the name and jurisdiction of organization, of each general
partnership and limited partnership of which Management Company is, directly or
indirectly, a partner (a "Partnership") and the nature and extent of its equity
interest therein. The Partnership agreements are listed in the Management
Company Disclosure Statement and true and correct copies have been made
available to Shurgard REIT. Management Company owns the percentages of each
class of equity interest of each Partnership as set forth in its respective
Partnership agreement, free and clear of all liens, security interests, charges
and encumbrances. With respect to such Partnerships, Management Company's rights
and interests as a partner as identified in the respective Partnership
agreements are unimpaired and in full force and effect. Management Company does
not own, directly or indirectly, any capital stock or other equity or ownership
or proprietary interest in any Subsidiary.
5.3 AGREEMENT
This Agreement and the consummation of the transactions contemplated hereby
have been approved by the Board of Directors of Management Company and have been
duly authorized by all other necessary corporate action on the part of
Management Company (except for the approval of Management Company's shareholders
contemplated by Section 7.3(a)). This Agreement has been duly executed and
delivered by a duly authorized officer of Management Company and, subject to
Management Company shareholder approval, constitutes a valid and binding
agreement of Management Company, enforceable against Management Company in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
application that may affect the enforcement of creditors' rights generally and
by general equitable principles. Management Company has delivered to Shurgard
REIT true and correct copies of resolutions adopted by the Board of Directors of
Management Company approving this Agreement and the transactions contemplated
hereby.
5.4 CAPITAL STOCK
The authorized capital stock of Management Company consists of ten million
(10,000,000) Shares, of which 4,203,854 shares are outstanding as of the date
hereof. All outstanding Shares are duly authorized, validly issued, fully paid
and nonassessable, and no class of capital stock of Management Company is
entitled to preemptive or cumulative voting rights. There are outstanding on the
date hereof no options, warrants, calls, rights, commitments or any other
agreements of any character to which Management Company is a party or by which
it may be bound, requiring it to issue, transfer, sell, purchase, redeem or
acquire any shares of capital stock or any securities or rights convertible
into, exchangeable for or evidencing the right to subscribe for or acquire any
shares of capital stock, except Options (vested or unvested) representing in the
aggregate the right to purchase up to 295,300 Shares pursuant to the Management
Company Option Plan. The following summary of all such Options outstanding as of
the date hereof is set forth on the Shurgard Disclosure Statement: date of
18
<PAGE>
issuance, vesting schedule, exercise price, expiration date and number of Shares
issuable upon exercise. No Person has any right to require Management Company to
repurchase or otherwise acquire any of such Person's outstanding securities.
5.5 LITIGATION
There are no actions, suits, investigations or proceedings (adjudicatory,
rulemaking or otherwise) pending or, to the knowledge of Management Company,
threatened against Management Company (or any Employee Plan or Benefit
Arrangement), or any property (including intellectual property) of Management
Company, in any court or before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, investigations or proceedings that, in
the aggregate, do not have and would not be reasonably expected (so far as can
be foreseen at the time) to have (a) a Management Company Material Adverse
Effect or (b) a material adverse effect on the ability of Management Company to
perform its obligations under this Agreement.
5.6 COMPLIANCE WITH OTHER INSTRUMENTS, ETC.
Management Company is not in violation of any term of (a) its charter,
bylaws or other organizational documents, (b) any Material Agreement, (c) any
applicable law, ordinance, rule or regulation of any Governmental Body, or (d)
any applicable order, judgment or decree of any court, arbitrator or
Governmental Body, except, as to subsections (a) through (d) of this Section,
where such violation, individually or in the aggregate, does not have and would
not be reasonably expected (so far as can be foreseen at the time) to have a
Management Company Material Adverse Effect or a material adverse effect on the
ability of Management Company to perform its obligations under this Agreement.
The execution, delivery and performance of this Agreement by Management Company
will not result in any violation of or conflict with, constitute a default
under, or require any consent under any term of the charter or bylaws of
Management Company or any Material Agreement, instrument, permit, license, law,
ordinance, rule, regulation, order, judgment or decree to which Management
Company is a party or to which Shurgard or any of their material assets are
subject, or result in the creation of (or impose any obligation on Management
Company to create) any mortgage, lien, charge, security interest or other
encumbrance upon any of the properties or assets of Management Company pursuant
to any such term, except where such violation, conflict or default, or the
failure to obtain such consent or the creation of such encumbrances,
individually or in the aggregate, does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a Management Company
Material Adverse Effect or a material adverse effect on the ability of
Management Company to perform its obligations under this Agreement.
5.7 COMPENSATION AND EMPLOYEE MATTERS
A true, correct and complete list of all directors, officers and key
personnel of Management Company, and the current annual salary, bonuses paid or
accrued for the year ending December 31, 1994 and any commitments to pay any
further bonuses for each such person is set forth on the Management Company
Disclosure Statement. The aggregate accrued vacation pay, if any, of the
employees of Management Company is accurately reflected in the Management
Company Financial Statements consistent with Management Company's employee
policies as in effect on the date of the Management Company Financial
Statements. The Management Company Disclosure Statement also includes a true and
accurate statement of the proposed salaries for officers and key personnel for
the fiscal year ending December 31, 1995.
5.8 EMPLOYEE BENEFIT PLANS
(a) The Management Company Disclosure Statement sets forth a true and
complete list of all the following: (i) each "employee benefit plan," as such
term is defined in Section 3(3) of ERISA (each, together with the Management
Company Option Plan, an "Employee Plan"), and (ii) each other plan, program,
policy, contract or arrangement providing for bonuses, pensions, deferred pay,
stock or stock-related awards, severance pay, salary continuation or similar
benefits, hospitalization, medical, dental or disability benefits, life
insurance or other employee benefits, or contract or agreement for compensation
to or for any current or former employees, agents, directors or independent
contractors of
19
<PAGE>
Management Company ("Employees") or any beneficiaries or dependents of any
Employee, whether or not insured or funded, (A) pursuant to which Management
Company has any liability or (B) constituting an employment or severance
agreement or arrangement with any officer or director of Management Company
(each, a "Benefit Arrangement"). Management Company has made available to
Shurgard REIT with respect to each Employee Plan and Benefit Arrangement: (i) a
true and complete copy of all written documents comprising such Employee Plan or
Benefit Arrangement or, if there is no such written document, an accurate and
complete description of such Employee Plan or Benefit Arrangement; (ii) the most
recent Form 5500 or Form 5500-C (including all schedules thereto), if
applicable; (iii) the most recent financial statements and actuarial reports, if
any; (iv) the summary plan description currently in effect and all material
modifications thereof, if any; and (v) the most recent Internal Revenue Service
determination letter, if any. All material contributions required to be made as
of the date hereof to the Employee Plans and Benefit Arrangements have been made
or provided for. Neither Management Company nor any Management Company entity
under "common control" with Management Company within the meaning of ERISA
Section 4001 has contributed to, or been required to contribute to, any
"multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA).
Management Company does not maintain or contribute to any plan or arrangement
which provides or has any liability to provide life insurance, medical or other
employee welfare benefits to any employee or former employee upon his or her
retirement or termination of employment and Management Company has not ever
represented, promised or contracted (whether in oral or written form) to any
employee or former employee that such benefits would be provided.
(b) Each Employee Plan and Benefit Arrangement has been established and
maintained in all material respects in accordance with its terms and in material
compliance with all applicable laws, including, but not limited to, ERISA and
the Code. Neither Management Company nor any of their current or former
directors, officers or employees, nor, to the knowledge of Management Company,
any other disqualified Person or party-in-interest with respect to any Employee
Plan, has engaged directly or indirectly in any "prohibited transaction," as
such term is defined in Section 4975 of the Code or Section 406 of ERISA.
(c) Management Company does not have an Employee Plan that is subject to
Title IV of ERISA and Management Company has not had an ERISA Affiliate at any
time since the earlier of its inception and September 2, 1974.
(d) Neither the execution or delivery of this Agreement nor the consummation
of the transactions contemplated hereby (either alone or together with any
additional or subsequent events) constitutes an event under any Employee Plan,
Benefit Arrangement or loan to, or individual agreement or contract with, an
Employee that may result in any payment (whether severance pay or otherwise),
restriction or limitation upon the assets of any Employee Plan or Benefit
Agreement, acceleration of payment or vesting, increase in benefits or
compensation, or required funding, with respect to any Employee, or the
forgiveness of any loan or other commitment of any Employees.
(e) All contributions required under applicable law or the terms of any
Employee Plan or other agreement relating to an Employee Plan to be paid by
Management Company have been completely and timely made to each Employee Plan
when due, and Management Company has established adequate reserves on its books
to meet liabilities for contributions accrued but that have not been made
because they are not yet due and payable.
(f) The Shurgard Incorporated Employee Stock Ownership Plan ("ESOP") is duly
organized and existing under applicable law, is a stock bonus plan qualified
under Section 401(a) of the Code and is an "employee stock ownership plan" as
defined in Section 4975(e)(7) of the Code. The trust under the ESOP is a duly
established and existing trust under applicable law. Management Company has duly
and validly reserved the right to terminate the ESOP in its entirety at any
time.
(g) No amounts paid or payable by Management Company to or with respect to
any Employee will fail to be deductible for federal income tax purposes by
reason of Section 280G of the Code.
20
<PAGE>
(h) No Employees and no beneficiaries or dependents of Employees are or may
become entitled under any Employee Plan or Benefit Arrangement to
post-employment welfare benefits of any kind, including, without limitation,
death or medical benefits, other than coverage mandated by Section 4980B of the
Code.
5.9 LABOR MATTERS
Management Company is not a party to, or bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization. There is no unfair labor practice or labor arbitration
proceeding pending or, to the knowledge of Management Company, threatened
against Management Company relating to their business. To the knowledge of
Management Company, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of Management Company.
5.10 TAXES
Management Company has (i) timely filed all Tax Returns required to be filed
by it and all such Tax Returns are true, correct and complete in all respects,
(ii) paid all Taxes due or claimed to be due by any federal state, local or
foreign taxing or customs authority and (iii) properly accrued all such Taxes
for such periods subsequent to the periods covered by such returns. There are no
liens for Taxes on any property or assets of Management Company other than liens
for current property taxes not yet due. The Tax Returns of Management Company
are not being and have not been examined by any taxing authority. Management
Company has not executed or filed with the IRS or any taxing authority any
agreement extending the limitations period of any Taxes. Management Company is
not a party to any pending action or proceeding by any taxing authority for
assessment or collection of Taxes, and no claim for assessment or collection of
Taxes has been asserted against it, including claims by an authority in a
jurisdiction where it does not file Tax Returns that it is or may be subject to
taxation in that jurisdiction. True, correct and complete copies of all Tax
Returns filed by Management Company and all examination reports, statements of
deficiencies assessed and communications from any taxing authority relating
thereto have been made available to Shurgard REIT.
Management Company has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party. Management
Company is not the beneficiary of any extension of time within which to file any
Tax Return. Management Company (i) has not filed a consent under Section 341(f)
of the Code concerning collapsible corporations; (ii) has not been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section 897(c)(1)(A)(2)(i)
of the Code; (iii) is not a party to any Tax allocation or sharing agreement;
and (iv) has no liability for Taxes of any Person under Section 1.1592-6 of the
Treasury Regulations (or any similar provision of state, local or foreign law)
as a transferor or successor by contract or otherwise. Management Company has
established (and until the Closing shall establish) on its books and records
reserves that are adequate for the payment of all Taxes not yet due and payable.
All federal, state and local Tax Returns required to be filed with respect
to the short taxable year of the Management Company as of the Effective Time,
will, when filed, be true, correct and complete in all respects.
5.11 INTELLECTUAL PROPERTY
(a) The Management Company Disclosure Statement sets forth a complete list
of the trademarks registered by Management Company and a list of all licenses,
sublicenses and agreements to which Management Company is a party regarding
Management Company Intellectual Property Rights material to Management Company's
business.
(b) To its knowledge, Management Company has not infringed upon or
misappropriated any intellectual property rights of third parties, and
Management Company has not received any charge,
21
<PAGE>
complaint, claim or notice alleging any such interference, infringement,
misappropriation or violation. To the knowledge of Management Company, no third
party has interfered with, infringed upon, misappropriated or otherwise come
into conflict with any Management Company Intellectual Property Rights except
for any such interference, infringement, misappropriation or violation which has
not had, and is not likely to have, a Management Company Material Adverse
Effect.
(c) Management Company has the right to transfer and assign all of the
Management Company Intellectual Property Rights set forth under Section 5.11(a).
To the knowledge of the Management Company, none of such Management Company
Intellectual Property is subject to any lien, encumbrance or claim of
infringement or otherwise, nor requires any consent, approval or waiver to be
conveyed to Shurgard REIT by way of the Merger.
5.12 FINANCIAL STATEMENTS
(a) Management Company has provided to Shurgard REIT true and correct copies
of its (i) audited consolidated balance sheets as of December 31, 1991, 1992 and
1993, and related audited statements of income and cash flows for the fiscal
years then ended, and (ii) unaudited consolidated balance sheets as of March 31,
June 30, September 30 and October 31, 1994 and related unaudited statements of
income and other statements for the fiscal quarters or month then ended
(collectively, the "Management Company Financial Statements"). Each of such
balance sheets (including the related notes) referred to in subsection (i)
hereof presents fairly, in all material respects, the consolidated financial
position of Management Company and its subsidiaries as of the respective dates
thereof, and the other related statements (including the related notes) included
therein present fairly, in all material respects, the results of their
operations and their cash flows for the respective periods or as of the
respective dates set forth therein, all in conformity with generally accepted
accounting principles consistently applied during the periods involved, except
as otherwise noted in the auditor's report. Each of such balance sheets referred
to in subsection (ii) hereof presents fairly, in all material respects, the
assets, liabilities, and shareholders' equity of Management Company and its
subsidiaries as of the respective dates thereof, and the other related
statements included therein present fairly, in all material respects, the
results of their operations for the respective periods or as of the respective
dates set forth therein, all on a basis consistent with Management Company's
internal monthly financial statements.
(b) The October 31 Statement, the Closing Statement and the Final Statement
has been or will be prepared in accordance with generally accepted accounting
principles on a going concern basis with the following exceptions: (i) European
investment is accounted for on the equity method, (ii) investment in affiliated
partnerships are accounted for based on the related 1993 K-1, and (iii)
administrative real estate department reimbursements are accounted for on the
cash basis. This basis is consistent with the audited and unaudited consolidated
financial statements of the Management Company described in (a) and (b) in the
preceding paragraph except for the following items: elimination of InterMation,
elimination of Shurgard Realty Advisors, elimination of incentive management
fees, treatment of administrative real estate reimbursements on a cash basis and
elimination of insurance payments related to buy-sell agreements.
As to the Closing Statement, as such will be prepared in advance of the
Closing Date, it may include management's good faith estimates of certain items
as to the Closing Date. As to the Closing Statement and the Final Statement, (a)
to the extent that Shurgard REIT Common Shares are included, such stock will be
valued at Market Value as of the Closing Date and (b) no liability for payments
related to dissenting shareholders will be accrued, and no such liability shall
constitute Damages, or be the basis for an adjustment of the Share
Consideration.
5.13 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as otherwise contemplated or as permitted herein in Section 7.1 or
elsewhere, during the period since October 31, 1994 (a) the business of
Management Company has been conducted only in the ordinary course, (b)
Management Company has not entered into any material transaction other
22
<PAGE>
than in the ordinary course, and (c) there has not been any change in the
business, financial condition, results of operations, properties, assets,
liabilities or prospects of Management Company which, in the aggregate, would
have a Management Company Material Adverse Effect.
5.14 BOOKS AND RECORDS
(a) The books of account and other financial records of Management Company
are in all material respects true, complete and correct, and are accurately
reflected in all material respects in the Management Company Financial
Statements.
(b) The minute books and other records of Management Company have been made
available to Shurgard REIT, contain in all material respects accurate records of
all meetings and accurately reflect in all material respects all other corporate
action of the shareholders and directors and any committees of the Board of
Directors of Management Company.
5.15 CONTRACTS AND LEASES
The Management Company Disclosure Statement contains an accurate and
complete listing of all material contracts, leases, agreements or
understandings, whether written or oral, of Management Company (the "Material
Agreements"). A contract, lease, agreement or understanding is "material" if it
involves (i) obligations (contingent or otherwise) of, or payments to Management
Company in excess of $100,000 per annum, (ii) partnership, management or
advisory agreements in excess of $100,000 per annum, or (iii) the license of any
patent, copyright, trade secret or other proprietary right (A) to Management
Company which is necessary for Management Company to carry on its business or
(B) from Management Company which materially limits the ability of Management
Company to carry on its business. Each Material Agreement is in full force and
effect and (a) neither Management Company nor, to the knowledge of Management
Company, any other party thereto has breached any of the above or is in material
default thereunder, (b) no event has occurred which, with the passage of time or
the giving of notice, or both, would constitute such a breach or default, (c) no
claim of material default thereunder has been asserted or threatened, and (d)
neither Management Company nor, to the best knowledge of Management Company, any
other party thereto is seeking the renegotiation thereof or substitute
performance thereunder.
5.16 TITLE TO PROPERTIES; ENCUMBRANCES
Except for properties and assets reflected in the unaudited consolidated
balance sheet as of October 31, 1994 or acquired since such balance sheet date
which have been sold or otherwise disposed of in the ordinary course of
business, Management Company has good, valid and marketable title to (a) all of
its material properties and assets (real and personal, tangible and intangible),
reflected in such balance sheet, except as indicated in the notes thereto, and
(b) all of the properties and assets purchased by Management Company since such
balance sheet date in each case subject to no encumbrance, lien, charge or other
restriction of any kind or character, except for (i) liens reflected in such
balance sheet, (ii) liens consisting of zoning restrictions or limitations on
the use of real property or irregularities in title thereto which do not
materially detract from the value of, or impair the use of, such property by
Management Company in the operation of its business, (iii) liens for current
taxes, assessments or governmental charges or levies on property not yet due and
delinquent and (iv) liens described in the Management Company Disclosure
Statement (liens of the type described in clauses (i), (ii) and (iii) above are
hereinafter sometimes referred to as "Permitted Liens").
5.17 REAL PROPERTY
The Management Company Disclosure Statement contains an accurate and
complete list of all real property owned in whole or in part by Management
Company and includes the name of the record title holder thereof and a list of
all indebtedness secured by a lien, mortgage or deed of trust thereon.
Management Company has good and marketable title in fee simple to all the real
property owned by it as reflected in the unaudited consolidated balance sheet as
of October 31, 1994, free and clear of all encumbrances, liens, charges or other
restrictions of any kind or character, except for Permitted Liens. All of the
buildings, structures and appurtenances situated on the real property owned in
whole
23
<PAGE>
or in part by Management Company are in good operating condition and in a state
of good maintenance and repair, are adequate and suitable for the purposes for
which they are presently being used and, with respect to each, Management
Company has adequate rights of ingress and egress for operation of the business
of Management Company or such Subsidiary in the ordinary course. None of such
buildings, structures or appurtenances (or any equipment therein), nor the
operation or maintenance thereof, to the knowledge of Management Company,
violates any restrictive covenant or any provision of federal, state or local
law, ordinance, rule or regulation, or encroaches on any property owned by
others, except for such violations or encroachments which do not have a
Management Company Material Adverse Effect. No condemnation proceeding is
pending or threatened which would preclude or impair the use of any such
property by Management Company for the purposes for which it is currently used.
5.18 ENVIRONMENTAL LAWS AND REGULATIONS
Management Company has made available to Shurgard REIT information relating
to the following items: (a) the nature and quantities of any Hazardous Materials
(as defined below) generated, treated, stored, handled, transported, disposed of
or released, to the knowledge of Management Company, by Management Company
during the past three years, together with a description of the location of each
such activity, and (b) a summary of the nature and quantities of any Hazardous
Materials that, to the knowledge of Management Company, have been disposed of or
found at any site or facility owned or operated presently or at any previous
time by Management Company. To the knowledge of Management Company, Management
Company is in compliance in all material respects with all applicable federal,
state and local laws and regulations relating to product registration, pollution
control and environmental contamination including, but not limited to, all laws
and regulations governing the generation, use, collection, discharge, or
disposal of Hazardous Materials and all laws and regulations with regard to
record keeping, notification and reporting requirements respecting Hazardous
Materials. Management Company has not been alleged to be in violation of, or has
been subject to any administrative or judicial proceeding pursuant to, such laws
or regulations either now or at any time during the past three years. Management
Company has no knowledge of any facts which Management Company considers likely
to form the basis for any Claim (as defined below) against Management Company
relating to environmental matters including, but not limited to, any Claim
arising from past or present environmental practices asserted under CERCLA (as
defined below) and RCRA (as defined below), or any other federal, state or local
environmental statute, which Management Company considers likely to have a
Management Company Material Adverse Effect.
For purposes of this representation the following terms shall have the
following meanings: (A) "Hazardous Materials" shall mean materials defined as
"hazardous substances," "hazardous wastes" or "solid wastes" in (i) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. SectionSection9601-9657, and any amendments thereto ("CERCLA"), (ii) the
Resource Conservation and Recovery Act, 42 U.S.C. SectionSection6901-6987 and
any amendments thereto ("RCRA"), and (iii) any similar federal, state or local
environmental statute; and (B) "Claim" shall mean any and all claims, demands,
causes of actions, suits, proceedings, administrative proceedings, losses,
judgments, decrees, debts, damages, liabilities, court costs, attorneys' fees
and any other expenses incurred, assessed or sustained by or against Shurgard.
5.19 AFFILIATED TRANSACTIONS
Set forth in the Management Company Disclosure Statement is a list of all
current material arrangements, agreements and contracts, written or oral,
entered into by Shurgard with any person who is an officer, director or
Affiliate of Management Company (other than Shurgard REIT), any relative of any
of the foregoing or any entity of which any of the foregoing is an Affiliate.
True and correct copies of all such documents have previously been delivered or
made available to Shurgard REIT.
5.20 BROKERS AND FINDERS
Except for the fees and expenses paid or payable to Nomura, which fees are
reflected in its agreement with Management Company, Management Company has not
entered into any contract,
24
<PAGE>
arrangement or understanding with any person or firm which may result in the
obligation of Management Company or Shurgard REIT to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. Except for the fees and expenses paid or payable by
Shurgard REIT to Alex. Brown and to Nomura by Management Company, Management
Company is not aware of any claim for payment of any investment banking fees,
finder's fees, brokerage or agent's commissions or other payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.
5.21 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS
None of the information supplied or to be supplied by Management Company for
inclusion in the S-4 Registration Statement as set forth in the Sections titled
"SUMMARY -- The Companies -- Shurgard Incorporated," "SUMMARY -- Action Taken by
Management Company Prior to the Merger," "SUMMARY -- Unaudited Pro Forma
Combined Financial Statements" (Post Merger Consolidation financial statements,
amounts in columns designated Management Company Core Business), "SUMMARY --
COMPARATIVE PER SHARE DATA" (amounts designated Management Company), "SHURGARD
INCORPORATED," "COMPARATIVE PER SHARE MARKET INFORMATION -- THE MANAGEMENT
COMPANY," "DESCRIPTION OF MANAGEMENT COMPANY CAPITAL STOCK," "EXECUTIVE
COMPENSATION," "PRINCIPAL MANAGEMENT COMPANY SHAREHOLDERS," "FINANCIAL
STATEMENTS -- MANAGEMENT COMPANY OF SHURGARD INCORPORATED", the Proxy
Statement/Prospectus or the Management Company Proxy Materials will (a) in the
case of the S-4 Registration Statement, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or (b) in the case of the Proxy Statement/Prospectus, at the time of
mailing the Proxy Statement/Prospectus and at the time of the Shurgard REIT
Stockholders Meeting, and in the case of the Management Company Proxy Materials,
at the time of mailing the Management Company Proxy Materials and at the time of
the Management Company Shareholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event with respect to Management Company or its officers
and directors shall occur that is required to be described in an amendment of,
or a supplement to, the Proxy Statement/Prospectus, the S-4 Registration
Statement or the Management Company Proxy Materials, Management Company shall
notify Shurgard REIT thereof by reference to this Section 5.21 and, in the case
of the Proxy Statement/ Prospectus or the S-4 Registration Statement, cooperate
with Shurgard REIT in preparing and filing an amendment or supplement with the
SEC and, as required by law, disseminating to the stockholders of Shurgard REIT
and/or the shareholders of Management Company an amendment or supplement which
accurately describes such event or events in compliance with all provisions of
applicable law.
5.22 INSURANCE
The Management Company Disclosure Statement contains an accurate list of all
insurance policies of Shurgard, and each such insurance policy is in full force
and effect and issued by a reputable insurer. All premiums due with respect to
such policies have been paid, and no notice of premium increase, cancellation or
termination has been received with respect to any such policy. Such policies (i)
are sufficient for compliance with requirements of law and with agreements to
which Management Company is a party, (ii) are valid, outstanding and
enforceable, (iii) provide insurance coverage for the assets and operations of
Management Company to the extent and in the manner that Management Company
considers reasonable for companies engaged in business similar to that of
Management Company, (iv) will remain in full force and effect through at least
the Closing Date and (v) will not be modified as a result of, or terminate or
lapse by reason of, the transactions contemplated by this Agreement. Management
Company has not been refused any insurance with respect to its assets or
operations, nor has its coverage been materially limited, by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance during the last three years.
25
<PAGE>
5.23 DISCLOSURE
The representations and warranties contained in this Agreement, in the
Management Company Disclosure Statement, or in any written certificate or
related agreement furnished or to be furnished to Shurgard REIT by Management
Company in connection with the Closing pursuant to this Agreement do not contain
any untrue statement of a fact or omit to state any material fact necessary to
make the statements and information contained herein or therein, in light of the
circumstances in which they are made, not misleading.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF SHURGARD REIT
Except as set forth in the Shurgard REIT SEC Reports and the Shurgard REIT
Disclosure Statement, Shurgard REIT hereby represents and warrants to Management
Company that, as of the date hereof:
6.1 ORGANIZATION, ETC. OF SHURGARD REIT
Shurgard REIT is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to own, lease and operate its properties, to carry
on its business as now conducted and proposed by Shurgard REIT to be conducted,
to enter into this Agreement and to carry out the provisions of this Agreement
and consummate the transactions contemplated hereby. Shurgard REIT is duly
qualified and in good standing in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary and where the failure to be so qualified has or
would be reasonably expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations, condition
(financial or other) or prospects of Shurgard REIT and its Subsidiaries taken as
a whole (taking into account any tax, insurance or indemnification benefits
received or to be received) (a "Shurgard REIT Material Adverse Effect").
Shurgard REIT has obtained from the appropriate Governmental Bodies all
approvals and licenses necessary for the conduct of its business and operations
as currently conducted, which approvals and licenses are valid and remain in
full force and effect, except where the failure to have obtained such approvals
or licenses or the failure of such approvals and licenses to be valid and in
full force and effect does not have and would not be reasonably expected (so far
as can be foreseen at the time) to have a Shurgard REIT Material Adverse Effect.
Shurgard REIT's and its Subsidiaries' Certificate of Incorporation, By-laws,
organizational documents and partnership agreements are listed in the Shurgard
REIT Disclosure Statement, and true and correct copies of such documents have
been made available to Management Company.
6.2 SUBSIDIARIES
The Shurgard REIT Disclosure Statement sets forth a true and complete list
of each of Shurgard REIT's Subsidiaries (the "Shurgard REIT Subsidiaries"). Each
Shurgard REIT Subsidiary (a) is a corporation or other legal entity duly
incorporated, validly existing and (if applicable) in good standing under the
laws of the jurisdiction of its incorporation or organization and has the full
power and authority to own its properties and conduct its business and
operations as currently conducted, except where the failure to be duly
incorporated or organized, validly existing and in good standing does not have,
and would not be reasonably expected (so far as can be foreseen at the time) to
have, a Shurgard REIT Material Adverse Effect, (b) is duly qualified and in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified does not have and would
not be reasonably expected (so far as can be foreseen at the time) to have an
Shurgard REIT Material Adverse Effect, and (c) has obtained from the appropriate
Governmental Bodies all approvals and licenses necessary for the conduct of its
business and operations as currently conducted, which approvals and licenses are
valid and remain in full force and effect, except where the failure to have
26
<PAGE>
obtained such approvals and licenses or the failure of such approvals and
licenses to be valid and in full force and effect does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have a Shurgard
REIT Material Adverse Effect.
All outstanding shares of capital stock of each Shurgard REIT Subsidiary are
duly authorized, validly issued, fully paid and nonassessable, and are owned, of
record and beneficially, by Shurgard REIT, free and clear of any liens,
encumbrances, equities, options or claims whatsoever. No shares of capital stock
of any Shurgard REIT Subsidiary are reserved for issuance. There are outstanding
no options, warrants or other rights to acquire capital stock from any Shurgard
REIT Subsidiary. Neither Shurgard REIT nor any Shurgard REIT Subsidiary owns,
directly or indirectly, any capital stock or other equity or ownership or
proprietary interest in any corporation, partnership, association, trust, joint
venture or other entity, except as set forth in the Shurgard REIT Disclosure
Statement.
6.3 AGREEMENT
This Agreement and the consummation of the transactions contemplated hereby
have been approved by the Board of Directors of Shurgard REIT, and have been
duly authorized by all other necessary corporate action on the part of Shurgard
REIT (except for the approval of Shurgard REIT's stockholders contemplated by
Section 7.3(b)). This Agreement has been duly executed and delivered by a duly
authorized officer of Shurgard REIT and, subject to Shurgard REIT stockholder
approval, constitutes a valid and binding agreement of Shurgard REIT,
enforceable against Shurgard REIT in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws of general application that may affect the enforcement of
creditors' rights generally and by general equitable principles. Shurgard REIT
has delivered to Management Company true and correct copies of resolutions
adopted by the Board of Directors of Shurgard REIT approving this Agreement and
the transactions contemplated hereby.
6.4 CAPITAL STOCK
The authorized capital stock of Shurgard REIT consists of (a) 120,000,000
shares of Shurgard REIT Common Shares, (b) 500,000 shares of Class B Common
Stock, $0.001 par value per share, (c) 160,000,000 shares of Excess Stock,
$0.001 par value per share, and (d) 80,000,000 shares of preferred stock, $0.001
par value per share. All outstanding Shurgard REIT Common Shares are duly
authorized, validly issued, fully paid and nonassessable, and no class of
capital stock of Shurgard REIT is entitled to preemptive or cumulative voting
rights. As of the date hereof, 16,829,283 Shurgard REIT Common Shares, 154,604
shares of Class B Common Stock, no shares of Excess Stock, and no shares of
preferred stock were issued and outstanding. Except as disclosed in the Shurgard
REIT SEC Reports, all outstanding shares of capital stock of the Subsidiaries of
Shurgard REIT are owned by Shurgard REIT or a direct or indirect wholly-owned
Subsidiary of Shurgard REIT, free and clear of all liens, charges, encumbrances,
claims and options of any nature.
6.5 AUTHORIZATION FOR SHURGARD REIT COMMON SHARES
Prior to the Effective Time, Shurgard REIT will have taken all necessary
action to permit it to issue the number of Shurgard REIT Common Shares required
to be issued pursuant to Article 4 and to reserve for issuance a sufficient
number of Shurgard REIT Common Shares for delivery upon determination of the
Contingent Shares (as contemplated in Section 4.7 above). The Share
Consideration and Contingent Shares will, when issued, be duly authorized,
validly issued, fully paid and nonassessable, and no shareholder of Shurgard
REIT will have any preemptive right of subscription or purchase in respect
thereof. The Share Consideration and Contingent Shares will, when issued, be
registered under the Securities Act and the Exchange Act and will be registered
or exempt from registration under all applicable state securities laws.
6.6 LITIGATION
There are no actions, suits, investigations or proceedings (adjudicatory,
rulemaking or otherwise) pending or, to the knowledge of Shurgard REIT,
threatened against Shurgard REIT or any of its
27
<PAGE>
Subsidiaries, or any property (including intellectual property) of Shurgard REIT
or any such Subsidiary, in any court or before any arbitrator of any kind or
before or by any Governmental Body, except actions, suits, investigations or
proceedings that, in the aggregate, do not have and would not be reasonably
expected (so far as can be foreseen at the time) to have (a) a Shurgard REIT
Material Adverse Effect or (b) a material adverse effect on the ability of
Shurgard REIT to perform its obligations under this Agreement.
6.7 COMPLIANCE WITH OTHER INSTRUMENTS, ETC.
Neither Shurgard REIT nor any Subsidiary of Shurgard REIT is in violation of
any term of (a) its charter, by-laws or other organizational documents, (b) any
agreement or instrument related to indebtedness for borrowed money or any other
agreement to which it is a party or by which it is bound, (c) any applicable
law, ordinance, rule or regulation of any Governmental Body, or (d) any
applicable order, judgment or decree of any court, arbitrator or Governmental
Body, except, as to subsections (a) through (d) of this Section, where such
violation, individually or in the aggregate, does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have a Shurgard
REIT Material Adverse Effect or a material adverse effect on the ability of
Shurgard REIT to perform its obligations under this Agreement. The execution,
delivery and performance of this Agreement by Shurgard REIT will not result in
any violation of or conflict with, constitute a default under, require any
consent under or result in the creation or issuance of Excess Stock under any
term of the charter or by-laws of Shurgard REIT (or any of its Subsidiaries) or
any agreement, instrument, permit, license, law, ordinance, rule, regulation,
order, judgment or decree to which Shurgard REIT (or any of its Subsidiaries) is
a part or to which Shurgard REIT (or any of its Subsidiaries) or any of their
material assets are subject, or result in the creation of (or impose any
obligation on Shurgard REIT to create) any mortgage, lien, charge, security
interest or other encumbrance upon any of the properties or assets of Shurgard
REIT or any of its Subsidiaries pursuant to any such term, except where such
violation, conflict or default, or the failure to obtain such consent or the
creation of such encumbrance, individually or in the aggregate, does not have
and would not be reasonably expected (so far as can be foreseen at the time) to
have (a) a Shurgard REIT Material Adverse Effect or (b) a material adverse
effect on the ability of Shurgard REIT to perform its obligations under this
Agreement.
6.8 REPORTS AND FINANCIAL STATEMENTS
Shurgard REIT has filed all reports required to be filed with the SEC since
February 28, 1994 (collectively, the "Shurgard REIT SEC Reports"), and has
previously furnished or made available to Management Company true and complete
copies of all Shurgard REIT SEC Reports. None of the Shurgard REIT SEC Reports,
as of their respective dates (as amended through the date hereof), contained any
untrue statement of material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. Each of the
balance sheets (including the related notes) included in the Shurgard REIT SEC
Reports presents fairly, in all material respects, the consolidated financial
position of Shurgard REIT and its Subsidiaries as of the respective dates
thereof, and the other related statements (including the related notes) included
therein present fairly, in all material respects, the results of operations and
the changes in financial position of Shurgard REIT and its Subsidiaries for the
respective periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted therein and subject, in
the case of the unaudited interim financial statements, to normal year-end
adjustments and any other adjustments described therein. All the Shurgard REIT
SEC Reports, as of their respective dates (as amended through the date hereof),
complied in all material respects with the requirements of the Exchange Act and
the applicable rules and regulations thereunder.
28
<PAGE>
6.9 BROKERS AND FINDERS
Except for the fees and expenses paid to Alex. Brown with respect to the
delivery of a fairness opinion to the Special Committee, which fees are
reflected in its agreement with the Special Committee, Shurgard REIT has not
employed any investment banker, broker, finder, consultant or intermediary in
connection with the transactions contemplated by this Agreement which would be
entitled to any investment banking, brokerage, finder's or similar fee or
commission in connection with this Agreement or the transactions contemplated
hereby.
6.10 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS
None of the information supplied or to be supplied by Shurgard REIT for
inclusion or incorporation by reference in the S-4 Registration Statement, the
Proxy Statement/Prospectus or the Management Company Proxy Materials will (a) in
the case of the S-4 Registration Statement, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading or (b) in the case of the Proxy Statement/Prospectus, at
the time of mailing the Proxy Statement/ Prospectus and at the time of the
Shurgard REIT Stockholders Meeting, and in the case of the Management Company
Proxy Materials, at the time of mailing the Management Company Proxy Materials
and at the time of the Management Company Shareholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event with respect to Shurgard REIT, its
officers and directors or any of its Subsidiaries shall occur that is required
to be described in an amendment of, or a supplement to, the Proxy
Statement/Prospectus, the S-4 Registration Statement or the Management Company
Proxy Materials, Shurgard REIT shall notify Management Company thereof by
reference to this Section 6.10 and, in the case of the Proxy
Statement/Prospectus or the S-4 Registration Statement, such event shall be so
described, and an amendment or supplement shall be promptly filed with the SEC
and, as required by law, disseminated to the stockholders of Shurgard REIT
and/or the shareholders of Management Company, and such amendment or supplement
shall comply with all provisions of applicable law. The S-4 Registration
Statement will comply (with respect to Shurgard REIT) as to form in all material
respects with the provisions of the Securities Act. The Proxy
Statement/Prospectus will comply (with respect to Shurgard REIT) in all material
respects with the requirements of the Exchange Act and the applicable rules and
regulations thereunder.
6.11 DISCLOSURE
The representations and warranties contained in this Agreement, in the
Shurgard REIT Disclosure Statement or in any written certificate or related
agreement furnished or to be furnished to Management Company by Shurgard REIT in
connection with the Closing pursuant to this Agreement do not contain any untrue
statement of a fact or omit to state any material fact necessary to make the
statements and information contained herein or therein, in light of the
circumstances in which they are made, not misleading.
ARTICLE 7
ADDITIONAL COVENANTS AND AGREEMENTS
7.1 CONDUCT OF BUSINESS OF MANAGEMENT COMPANY
Except as contemplated by this Agreement or as set forth in the Management
Company Disclosure Statement, during the period from the date of this Agreement
to the Effective Time, Management Company will pursue its business in the
ordinary course, with no less diligence and effort than would be applied in the
absence of this Agreement; will seek to preserve intact its current business
organization, keep available the service of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it with the objective that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time; and will not, without the
prior written consent of Shurgard REIT:
29
<PAGE>
(a) except for Shares issuable upon exercise of Options outstanding as
of the date hereof under the Management Company Option Plan, issue, deliver,
sell, dispose of, pledge or otherwise encumber, or authorize or propose the
issuance, delivery, sale, disposition or pledge or other encumbrances of (i)
any additional shares of its capital stock of any class (including the
Shares), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any shares of its capital stock, or
any rights, warrants, options, calls, commitments or any other agreements of
any character to purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for or evidencing the
right to subscribe for any shares of its capital stock, or (ii) any other
securities in respect of, in lieu of or in substitution for Shares
outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem,
purchase or otherwise acquire, any of its outstanding securities (including
the Shares);
(c) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or make any
other actual, constructive or deemed distribution in respect of any shares
of its capital stock or otherwise make any payments to shareholders in their
capacity as such;
(d) (i) grant any increases in the compensation of any of its directors,
officers or employees, except in the ordinary course of business consistent
with past practice (except within the parameters noted on the Management
Company Disclosure Statement by virtue of Section 5.7 hereof), (ii) pay or
agree to pay any pension, retirement allowance or other material employee
benefit not required or contemplated by any Employee Plan or Benefit
Arrangement as in effect on the date hereof to any such director, officer or
employee, whether past or present, (iii) enter into any new or amend any
existing employment or severance agreement with any such director, officer
or employee, except (1) as required for the termination of such agreement
(2) in the ordinary course and under $10,000 with respect to any employee or
(3) as required for the assumption of such agreement by Shurgard REIT, or as
otherwise approved by Shurgard REIT in its sole discretion, (iv) pay or
agree to pay any bonus to any director, officer or employee (whether in the
form of cash, capital stock or otherwise), or (v) except as may be required
to comply with applicable law, amend any existing, or become obligated under
any new, Employee Plan or Benefit Arrangement;
(e) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization (other than the Merger);
(f) make any acquisition, by means of merger, consolidation or
otherwise, of (i) any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (ii) except in the
ordinary course and consistent with past practice, any other assets;
(g) adopt any amendments to its charter or bylaws;
(h) other than borrowings under existing credit facilities, or other
borrowing in the ordinary course, incur any indebtedness for borrowed money
or guarantee any such indebtedness or, except in the ordinary course
consistent with past practice, make any loans, advances or capital
contributions to, or investments in, any Partnership or other Person;
(i) engage in the conduct of any business the nature of which is
materially different than the business Management Company is currently
engaged in;
(j) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of
Management Company;
(k) enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services over a period greater
than 12 months and for the expenditure of greater than $75,000 per year,
which is not cancelable without penalty on 30 days' or less notice, except
in the ordinary course of business;
30
<PAGE>
(l) forgive any indebtedness owed to Management Company or convert or
contribute by way of capital contribution any such indebtedness owed;
(m) authorize or enter into any agreement providing for property
management services to be provided by Management Company to third-party
property owners or an increase in management fees paid by third-party
property owners under existing property management agreements;
(n) authorize or enter into any agreement that would jeopardize the
qualification of Shurgard REIT as a real estate investment trust pursuant to
Section 856 of the Code if such agreement had been entered into by Shurgard
REIT; or
(o) authorize or announce an intention to do any of the foregoing, or
enter into any contract, agreement, commitment or arrangement to do any of
the foregoing.
7.2 OTHER TRANSACTIONS
Prior to the Effective Time, Shurgard REIT and Management Company each agree
(a) that neither of them shall, and each of them shall direct and use its best
efforts to cause its respective officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it) not to, initiate, solicit or encourage, directly
or indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders
or shareholders, respectively) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, such party, other than the transactions contemplated by this
Agreement (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; (b) that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 7.2; and (c) that it will notify the other party immediately if any such
inquiries or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with, it; provided, however, that nothing contained in this Section 7.2 shall
prohibit the Board of Directors of such party from (i) furnishing information to
or entering into discussions or negotiations with, any person or entity that
makes an unsolicited bona fide Acquisition Proposal, if, and only to the extent
that, (A) the Board of Directors of such party determines in good faith that
such action is required for the Board of Directors to comply with its fiduciary
duties to stockholders or shareholders, as the case may be, imposed by law, (B)
prior to furnishing such information to, or entering into discussions or
negotiations with, such Person or entity, such party provides written notice to
the other party to this Agreement to the effect that it is furnishing
information to, or entering into discussions with, such person or entity, and
(C) subject to any confidentiality agreement with such person (which such party
determined in good faith was required to be executed in order for the Board of
Directors to comply with its fiduciary duties to stockholders or shareholders,
as the case may be, imposed by law), such party keeps the other party to this
Agreement informed of the status (not the terms) of any such discussions or
negotiations; and (ii) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
Nothing in this Section 7.2 shall (x) permit any party to terminate this
Agreement, (y) permit any party to enter into any agreement with respect to an
Acquisition Proposal during the term of this Agreement (it being agreed that
during the term of this Agreement, no party shall enter into any agreement with
any person that provides for, or in any way facilitates, an Acquisition Proposal
(other than a confidentiality agreement in customary form)), or (z) affect any
other obligation of any party under this Agreement.
31
<PAGE>
7.3 MEETINGS OF SHAREHOLDERS AND STOCKHOLDERS
(a) Management Company will take all action necessary in accordance with
applicable law and its Articles of Incorporation and Bylaws to convene a meeting
of its shareholders (the "Management Company Shareholders Meeting") as promptly
as practicable to consider and vote upon the approval of the Merger. Subject to
the fiduciary duties of Management Company's Board of Directors under applicable
law as advised by counsel, the Board of Directors of Management Company shall
recommend and declare advisable such approval and Management Company shall take
all lawful action to solicit, and use all reasonable efforts to obtain, such
approval. Prior to the Closing Date, the Management Company shall take all
reasonable steps to cause Barbo, Buerk, Daniels and R. Knutzen (as Trustee for
the Barbo Trust) to enter into an agreement with Shurgard REIT (the
"Shareholders Voting Agreement"), pursuant to which each of such shareholders
shall agree to vote all Shares owned by them or to which they have the right to
vote in favor of approval of the Merger at the Management Company Shareholders
Meeting.
(b) Shurgard REIT will take all action necessary in accordance with
applicable law and Shurgard REIT's Certificate of Incorporation and By-laws to
convene a meeting of its stockholders (the "Shurgard REIT Stockholders Meeting")
as promptly as practicable to consider and vote upon the approval of the Merger
and the issuance of Shurgard REIT Common Shares in the Merger. Subject to the
fiduciary duties of Shurgard REIT's Board of Directors under applicable law as
advised by counsel, the Board of Directors of Shurgard REIT shall recommend and
declare advisable such approval and Shurgard REIT shall take all lawful action
to solicit, and use all reasonable efforts to obtain, such approval.
7.4 REGISTRATION STATEMENT/PROXY MATERIALS
After the date hereof, Shurgard REIT and Management Company shall cooperate
and promptly prepare and Shurgard REIT shall file with the SEC as soon as
practicable a registration statement on Form S-4 (the "S-4 Registration
Statement"), containing a proxy statement/prospectus, in connection with the
registration under the Securities Act of the Share Consideration and the
Contingent Shares issuable upon conversion of the Shares and the other
transactions contemplated hereby. Shurgard REIT will also, as promptly as
practicable, prepare and file with the SEC a proxy statement that will be the
same proxy statement/prospectus contained in the S-4 Registration Statement and
a form of proxy, in connection with the vote of Shurgard REIT's stockholders
with respect to the Merger (such proxy statement/prospectus, together with any
amendments thereof or supplements thereto, in each case in the form or forms
mailed to Shurgard REIT's stockholders, is herein called the "Proxy
Statement/Prospectus"). Management Company will, as promptly as practicable,
prepare a notice of the Management Company Shareholders Meeting and a form of
proxy and such other written materials as may be required by the WBCA or other
applicable law in connection with the vote of Management Company's shareholders
with respect to the Merger (such materials, together with any amendments thereof
or supplements thereto, in each case in the form or forms mailed to Management
Company's shareholders, is herein called the "Management Company Proxy
Materials"). Shurgard REIT and Management Company will use all reasonable
efforts to have the S-4 Registration Statement, or cause it to be, declared
effective as promptly as practicable, and also will take any other action
required to be taken under federal or state securities laws, and will use all
reasonable efforts to cause the Proxy Statement/Prospectus to be mailed to
stockholders of Shurgard REIT and the Management Company Proxy Materials to be
mailed to shareholders of Management Company at the earliest practicable date.
If at any time prior to the Effective Time any event relating to it or affecting
Management Company or Shurgard REIT shall occur as a result of which it is
necessary, in the opinion of counsel for Management Company or of counsel for
Shurgard REIT, to supplement or amend the S-4 Registration Statement in order to
make such document not misleading in light of the circumstances existing at the
time approval of the shareholders of Management Company is sought, Management
Company and Shurgard REIT forthwith will prepare and file with the SEC an
amendment or supplement to the S-4 Registration Statement so that such document,
as so supplemented or
32
<PAGE>
amended, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances existing at such time, not misleading.
7.5 FILINGS; OTHER ACTION
Management Company and Shurgard REIT shall: (a) to the extent required,
promptly make all filings and thereafter make any other required submissions
under the HSR Act with respect to the Merger; (b) use all reasonable efforts to
cooperate with one another to (i) determine which Authorizations are required to
be made or obtained prior to the Effective Time in connection with the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby and (ii) timely make and seek all such Authorizations; (c)
use all reasonable efforts to obtain in writing any consents required from third
parties in form reasonably satisfactory to Shurgard REIT and Management Company
necessary to effectuate the Merger; (d) use all reasonable efforts to promptly
take, or cause to be taken, all other actions and do, or cause to be done, all
other things necessary, proper or appropriate to satisfy the conditions set
forth in Article 8 and to consummate and make effective the transactions
contemplated by this Agreement on the terms and conditions set forth herein as
soon as practicable (including seeking to remove promptly any injunction or
other legal barrier that may prevent such consummation); and (e) not take any
action which might reasonably be expected to impair the ability of the parties
to consummate the Merger at the earliest possible time.
7.6 ACCESS TO INFORMATION
From the date hereof until the Effective Time, Management Company will give
Shurgard REIT, its counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of
Management Company, will furnish to Shurgard REIT, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such persons may reasonably request and
will instruct Management Company's employees, counsel and financial advisors to
cooperate with Shurgard REIT in its investigation of the business of Management
Company; provided that no investigation pursuant to this Section shall affect
any representation or warranty given by Management Company to Shurgard REIT
hereunder.
7.7 LISTING APPLICATION
Shurgard REIT promptly shall prepare and submit to the Exchange a listing
application covering the Shurgard REIT Common Shares issuable in the Merger, and
shall use its reasonable efforts to obtain, prior to the Effective Time,
approval for the listing of such Shurgard REIT Common Shares, subject to
official notice of issuance.
7.8 AFFILIATES OF MANAGEMENT COMPANY
(a) Set forth in the Management Company Disclosure Statement are the persons
who may be deemed to be "affiliates" of Management Company for purposes of Rule
145 under the Securities Act ("Rule 145 Affiliates") or who may otherwise be
deemed to be Affiliates of Management Company. By agreement dated the date
hereof, each of the Rule 145 Affiliates has delivered a letter (each, an
"Affiliate Letter") to Shurgard REIT indicating that such Rule 145 Affiliate
will not sell, pledge, transfer or otherwise dispose of any Shurgard REIT Common
Shares issued to such Rule 145 Affiliate pursuant to the Merger, except (i)
pursuant to an effective registration statement, (ii) in compliance with Rule
145 or (iii) pursuant to a transaction exempt from, or otherwise not subject to,
the registration requirements of the Securities Act (provided, however, that any
transferee pursuant to a transaction described in (iii) shall agree in writing
to hold the Shurgard REIT Common Shares subject to the restrictions set forth in
the Affiliate Letter). Shurgard REIT shall be entitled to place legends as
specified in such Affiliate Letters on the certificates evidencing any Shurgard
REIT Common Shares to be received by such Affiliates pursuant to the terms of
this Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for the Shurgard REIT Common Shares, consistent with the terms of
such Affiliate Letters.
33
<PAGE>
(b) Shurgard REIT shall file the reports required to be filed by it under
the Exchange Act and the rules and regulations adopted by the SEC thereunder,
and it will take such further action as any Rule 145 Affiliate may reasonably
request, all to the extent required from time to time to enable such Rule 145
Affiliate to sell Shurgard REIT Common Shares received by such Rule 145
Affiliate in the Merger without registration under the Securities Act pursuant
to Rule 145(d)(1) under the Securities Act, as such Rule may be amended from
time to time.
7.9 TAX MATTERS
(a) Each of Management Company and Shurgard REIT agrees to report the Merger
on all Tax Returns and other filings as a tax-free reorganization under Section
368(a)(1) of the Code. Furthermore, notwithstanding the terms and provisions of
Sections 4.1(a)(ii) and 4.7 hereof, the parties hereby agree that the aggregate
number of Shurgard REIT Common Shares issued (a) as Contingent Shares pursuant
to Sections 4.1(a)(ii) and 4.7 and (b) as additional Shurgard REIT Common Shares
issued as a result of any Under-Statement pursuant to Section 4.1(d)(ii)(D)
shall not exceed the aggregate number of Shurgard REIT Common Shares issued as
Share Consideration at the Effective Time pursuant to Sections 4.1(a)(i), as
adjusted pursuant to Section 4.1(d), excluding any additional Shurgard REIT
Common Shares issued as a result of any Under-Statement pursuant to Section
4.1(d)(ii)(D). The parties understand that this limitation is necessary to
support the opinion to be provided by counsel to Shurgard REIT pursuant to
Section 8.3(b) that the Merger qualifies as a reorganization pursuant to Section
368(a)(1) of the Code.
(b) The Representatives shall prepare or cause to be prepared and filed on
behalf of the Management Company, but at the sole cost and expense of the
Shurgard REIT, all federal, state, and local Tax Returns required to be filed
with respect to the short taxable year of the Management Company ending as of
the Effective Time. Shurgard REIT and its personnel will cooperate with the
Representatives in the preparation and filing of all such Tax Returns, shall
provide reasonable access to the books and records of the Management Company for
such purposes, and shall make available its personnel, counsel, accountants, and
other resources as shall be reasonably necessary to enable the Representatives
to prepare or cause to be prepared and filed in a timely manner all such Tax
Returns. In connection with the filing of the federal income Tax Return of the
Management Company for its short taxable year ending as of the Effective Time,
the InterMation Spin-Off shall be reported in all respects as a transaction
qualifying under Section 355(a)(1) of the Code. The Representatives will
promptly update their study of accumulated earnings and profits to include the
year ended December 31, 1994 and the short period ending on the Effective Time.
In addition, to the extent that the Management Company incurs a net operating
loss ("NOL") for its short taxable year ending as of the Effective Time, the
Representatives shall prepare or cause to be prepared and filed with the
Internal Revenue Service Form 1139 and shall take such other action as shall be
necessary or appropriate to carry back such NOL to a prior taxable year of the
Management Company so that a refund of federal income tax can be claimed for
such taxable year and a "tentative carry-back adjustment", in the amount of such
claimed refund, can be obtained pursuant to Section 6411 of the Code.
(c) If the Internal Revenue Service or any other taxing authority initiates
an audit or examination of any Tax Return of the Management Company or denies or
disputes payment, or the amount, of the Refund (a "Tax Audit"), the Shurgard
REIT shall give prompt notice thereof to the Representatives, and the
Representatives shall have the sole and exclusive right to manage and control
such Tax Audit and to contest, settle, or compromise any issues raised during
the course of such Tax Audit. In handling any such Tax Audit the Representatives
may engage counsel, accountants, or other advisors reasonably acceptable to the
Shurgard REIT and shall keep management of the Shurgard REIT regularly advised
of the course of such Tax Audit. If it elects to do so, the Shurgard REIT also
may engage counsel, accountants, or other advisors reasonably acceptable to the
Representatives to monitor the progress of any such Tax Audit. All costs and
expenses incurred either by the Representatives or by the Shurgard REIT in
connection with any such Tax Audit, including the fees and expenses of counsel,
accountants, and other advisors selected either by the Representatives or the
Shurgard REIT shall be borne by the Shurgard REIT, without reimbursement.
34
<PAGE>
(d) If, at the conclusion of a Tax Audit or otherwise, the Internal Revenue
Service or any other taxing authority should assert a deficiency or claim an
underpayment of Tax (including interest and penalties, if any) against either
the Management Company or the Shurgard REIT with respect to any Tax Return of
the Management Company for any taxable year ending on or before the Effective
Time (a "Tax Claim"), and if the payment of such Tax Claim by the Shurgard REIT,
as successor in interest to the Management Company, would constitute Damages for
which the Shurgard REIT is entitled to indemnification pursuant to Section 4.8,
then the Representatives shall have the sole and exclusive right to defend and
contest such Tax Claim through such administrative or judicial proceedings as
they may elect (a "Tax Contest"), until a Final Determination is made with
respect to such Tax Claim. The Representatives may engage counsel, accountants,
and other advisors reasonably acceptable to the Shurgard REIT to assist them in
handling the Tax Contest. All costs and expenses incurred by the Representatives
in handling such Tax Contest, if finally resulting in such Damages, including
the fees and costs of counsel, accountants, and other advisors, shall be paid by
the Shurgard REIT and shall constitute additional Damages for which the Shurgard
REIT shall be entitled to indemnification pursuant to Section 4.8. The Shurgard
REIT and its personnel will cooperate with the Representatives and their
advisors in the defense of any such Tax Claim and in the handling of any such
Tax Contest. The Shurgard REIT also may elect to engage, at its own cost and
expense, counsel, accountants, or other advisors reasonably acceptable to the
Representatives to monitor the progress of the Tax Contest and to assist the
Representatives and their advisors as appropriate. The Representatives shall
have the sole and exclusive right to settle any Tax Contest and compromise any
Tax Claim made against the Management Company or the Shurgard REIT which is
subject to indemnification pursuant to Section 4.8, provided, however, that the
Representatives shall not settle any such Tax Contest or compromise any such Tax
Claim without the consent of the Shurgard REIT, to the extent such settlement or
compromise would result in any Tax liability or other claim (including any
pending or reasonably foreseeable claim) in excess of the amount of Damages that
may then be available for indemnification under Section 4.8 hereunder.
7.10 INTERMATION SPIN-OFF
Prior to the Closing, Management Company shall distribute all of the shares
of capital stock of InterMation held by Management Company to its shareholders
pro rata in a transaction intended to qualify for tax-free treatment under
Section 355(a)(1) of the Code pursuant to the terms of an Agreement and Plan of
Corporate Separation between Management Company and InterMation in form and
substance acceptable to Shurgard REIT, acting reasonably (the "InterMation
Spin-Off"). Management Company agrees to report the InterMation Spin-Off on all
Tax Returns and other filings as a tax-free distribution pursuant to Section
355(a)(1) of the Code. Shurgard REIT will not take any position on any Tax
Return or other filing or in connection with any audit or examination of any Tax
Return which is inconsistent with the qualification of the InterMation Spin-Off
as a tax-free distribution pursuant to Section 355(a)(i) of the Code. In the
event that there is a determination or a claim by an applicable taxing authority
that the InterMation Spin-Off does not qualify under Section 355(a)(1) of the
Code Shurgard REIT will promptly notify its stockholders regarding the ability
to file protective refund claims and will take all reasonable actions to assist
its stockholders in filing and prosecuting such refund claims.
7.11 SHURGARD REALTY ADVISORS
Prior to the Closing (a) the sale or other disposition of Shurgard Realty
Advisors to such purchaser and for such consideration as the Board of Directors
of Management Company deems appropriate shall have occurred and (b) Shurgard
Realty Advisors shall have entered into an agreement with Shurgard REIT
providing that so long as (i) Shurgard Realty Advisors shall be maintained as a
legal entity licensed as a broker-dealer and (ii) Shurgard REIT shall reimburse
Shurgard Realty Advisors for the costs of maintaining its licenses as a
broker-dealer, Shurgard Realty Advisors shall grant Shurgard REIT broker-dealer
services on financial terms substantially similar to those provided to Shurgard
REIT in connection with the consolidation of Shurgard REIT; provided that
Shurgard
35
<PAGE>
Realty Advisors shall have the right, upon thirty (30) days' notice to Shurgard
REIT, to allow Shurgard Realty Advisors' broker-dealer licenses to lapse and/or
to dissolve Shurgard Realty Advisors (the "SRA Letter").
7.12 MANAGEMENT AND ADVISORY AGREEMENTS
Prior to the Closing, Management Company shall use all reasonable efforts to
cause the owners of all properties managed and of all partnerships advised by
Management Company to consent to the management of such properties and
assumption of such advisory functions by the Surviving Corporation to the extent
required by the existing management and advisory agreements relating thereto.
7.13 INTELLECTUAL PROPERTY RIGHTS
Prior to the Closing, Management Company shall use all reasonable efforts to
obtain all assignments or other consents necessary with respect to the
Management Company Intellectual Property Rights listed on the Management Company
Disclosure Statement.
7.14 EMPLOYEES
Shurgard REIT agrees to employ at the Effective Time all employees of
Management Company who are employed on the Closing Date on terms consistent with
Management Company's current employment practices and at comparable levels of
compensation and positions, except that such employment shall be at will and
Shurgard REIT shall be under no obligation to continue to employ any of such
individuals for more than thirty (30) days after Closing. For purposes of this
Section 7.14, the term "employees" shall mean all current employees of
Management Company and its Subsidiaries (including those on disability or leave
of absence, paid or unpaid). Notwithstanding the foregoing, the terms of (a)
that certain Employee Employment Agreement between Management Company and Allyn
Finch dated as of September 1, 1994, (b) that certain Employee Agreement between
Management Company and Kim Kimbrell dated as of September 1, 1994, and (c) that
certain memorandum dated November 3, 1994 regarding a long term incentive
compensation plan for Ron Newhouse (to the extent executed by same) shall
expressly be assumed by Shurgard REIT.
7.15 REORGANIZATION
From and after the date hereof and prior to the Effective Time, except for
the transactions contemplated or permitted herein, neither Management Company
nor Shurgard REIT shall knowingly take any action that would be inconsistent
with the representations and warranties made by them herein, including, but not
limited to knowingly taking any action, or knowingly failing to take any action
that is known to cause disqualification of (A) the Merger as a reorganization
within the meaning of Section 368(a)(1) of the Code, or (B) the InterMation
Spin-Off as a qualified distribution under Section 355(a)(1) of the Code.
Furthermore, from and after the date hereof and prior to the Effective Time,
except for the transactions contemplated or permitted herein, Management Company
shall use its best efforts to conduct its business and file Tax Returns in a
manner that would not jeopardize the qualification of Shurgard REIT after the
Effective Time as a real estate investment trust as defined within Section 856
of the Code.
7.16 PUBLIC STATEMENTS
The parties shall consult with each other prior to issuing any public
announcement or statement with respect to this Agreement or the transactions
contemplated hereby and shall not issue any such public announcement or
statement prior to such consultation, except as may be required by law or by the
rules of the NASD.
7.17 ESOP
(a) Management Company shall take all reasonable steps toward the end that
(i) any merger of Management Company's qualified retirement plans prior to the
transactions that are contemplated hereby will comply with applicable law and
the resulting merged plan ("Merged Plan") will continue to be qualified under
Code Section 401(a); (ii) the transactions contemplated hereby as they relate to
the ESOP or Merged Plan (including, but not limited to, the exchange of Shares
and the redemption of InterMation shares held by the ESOP) will not result in a
prohibited transaction under ERISA or the
36
<PAGE>
Code, or otherwise violate applicable law, nor will they result in the
imposition of any state, federal or local excise tax on Management Company or
any other person; and (iii) following the Merger, InterMation shall offer to
repurchase from the Merged Plan any shares of InterMation capital stock so held
at a price per share reflective of the then fair market value thereof.
(b) Shurgard REIT agrees to take all appropriate and necessary steps to
adopt the Merged Plan as the successor employer thereunder.
7.18 LETTER OF SHURGARD'S ACCOUNTANTS
The Management Company shall use its best efforts to cause to be delivered
to Shurgard REIT an "agreed-upon procedures" report of Deloitte & Touche LLP,
dated a date within two business days before the date on which the S-4
Registration Statement shall become effective and addressed to Shurgard REIT, in
form and substance reasonably satisfactory to Shurgard REIT and customary in
scope and substance for reports delivered by independent public accountants in
connection with registration statements similar to the S-4 Registration
Statement.
7.19 OPINION OF FINANCIAL ADVISOR
Shurgard REIT shall use its best efforts to cause Alex. Brown to provide its
opinion, as to the fairness, from a financial point of view, of the
consideration payable in connection with the Merger, and shall include such
opinion in the Proxy Statement/Prospectus.
7.20 NOTICE OF CERTAIN EVENTS
Each party hereto shall promptly notify the other party of (i) any notice or
other communication from any Person alleging that the consent of such Person is
or may be required in connection with the transactions contemplated by this
Agreement; (ii) any notice or other communication from any Governmental Body in
connection with the transactions contemplated by this Agreement; and (iii) any
actions, suits, claims, investigations or proceedings commenced or, to its
knowledge threatened against, relating to or involving or otherwise affecting
either party or any of its Subsidiaries which, if pending on the date of this
Agreement, would have been required to have been disclosed in the Management
Company Disclosure Statement pursuant to Section 5.5 or in the Shurgard REIT
Disclosure Statement pursuant to Section 6.6 or which relate to the consummation
of the transactions contemplated by this Agreement.
7.21 DIRECTOR AND OFFICER INDEMNIFICATION
From and after the Effective Date, Shurgard REIT shall keep in effect
provisions in its Certificate of Incorporation and By-laws providing for
limitation of director liability and indemnification of directors, officers,
employees and agents at least to the extent that such persons are entitled
thereto under the Articles of Incorporation and Bylaws of Management Company on
the date hereof, subject to Delaware law (and, to the extent that the Shurgard
REIT By-laws do not provide for indemnification of directors or officers of
predecessor corporations, shall contractually assume the indemnification
obligations under Management Company's Bylaws, subject to Delaware law), which
provisions shall not be amended, repealed or otherwise modified in any manner
that would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors, officers, employees or agents of
Management Company in respect of actions or omissions occurring at or prior to
the Effective Time (including, without limitation, the transactions contemplated
by this Agreement), unless such modification is required by law.
7.22 WORKING CAPITAL
Management Company agrees that as of the Closing Date, there shall be an
aggregate amount of (i) cash and short-term investments and (ii) fees and
reimbursable receivables of not less than $1,060,700 ("Minimum Working
Capital").
7.23 CONTINGENT SHARES
Shurgard REIT agrees to act in good faith with respect to the Contingent
Partnerships and the right of the Management Company shareholders to receive
Contingent Shares and further agrees not to take any action, or fail to take any
action, that reasonably could be anticipated to adversely affect
37
<PAGE>
the Contingent Partnerships, the Project Partnerships, or the value of the
Partnership Facilities or the right of the Management Company shareholders to
receive Contingent Shares, including, without limitation, voting or failing to
vote with respect to any matter submitted to a vote of the partners of any
Contingent Partnership or Project Partnership, or amending the partnership
agreements of any Contingent Partnership or Project Partnership in which
Shurgard REIT is a partner.
7.24 FURTHER ACTION
Each party hereto shall, subject to the fulfillment or waiver at or before
the Effective Time of each of the conditions of performance set forth herein,
perform such further acts and execute such documents as may reasonably be
required to effect the Merger.
ARTICLE 8
CONDITIONS
8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS
(a) The respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Closing Date of each of the following conditions, which conditions may not be
waived:
(i) Management Company Shareholder Approval
This Agreement and the transactions contemplated hereby shall have been
duly approved or ratified by the requisite holders of Shares in accordance
with applicable provisions of the WBCA (including, without limitation, RCW
23B.08.730), the Articles of Incorporation and Bylaws of Shurgard.
(ii) Shurgard REIT Stockholder Approval
The Agreement and the transactions contemplated hereby shall have been
duly approved by the requisite holders of Shurgard REIT capital stock in
accordance with applicable provisions of the DGCL and the Certificate of
Incorporation and By-laws of Shurgard REIT.
(iii) HSR Act
The waiting period applicable to the consummation of the Merger under
the HSR Act, if applicable, shall have expired or been terminated.
38
<PAGE>
(iv) Contingent Shares Agreement
The Contingent Shares Agreement described in Section 4.7 above shall
have been executed and delivered by all requisite parties thereto.
(v) Indemnification Escrow Agreement
The Indemnification Escrow Agreement described in Section 4.8 above
shall have been executed and delivered by all requisite parties thereto.
(vi) No Injunction or Proceedings
There shall not be in effect any judgment, writ, order, injunction or
decree of any court or Governmental Body of competent jurisdiction
restraining, enjoining or otherwise preventing consummation of the
transactions contemplated by this Agreement or permitting such consummation
only subject to any condition or restriction unacceptable to either of
Shurgard REIT or Management Company, each in its reasonable judgment, nor
shall there be pending or threatened by any Governmental Body any suit,
action or proceeding, and there shall not be pending by any other Person any
suit, action or proceeding seeking to restrain or restrict the consummation
of the Merger or seeking damages in connection therewith, which, in the
reasonable judgment of either Shurgard REIT or Management Company could have
(a) a Shurgard REIT Material Adverse Effect or a Management Company Material
Adverse Effect, respectively, or (b) a material adverse effect on the
ability of Shurgard REIT or Management Company, respectively, to perform its
obligations under this Agreement.
(vii) Registration Statement
The S-4 Registration Statement shall have been declared effective and
shall be effective at the Effective Time, and no stop order suspending
effectiveness shall have been issued; no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have
been initiated and be continuing; and all necessary approvals under state
securities laws or the Securities Act or Exchange Act relating to the
issuance or trading of the Shurgard REIT Common Shares shall have been
received.
(b) The respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to
Closing Date of each of the following conditions, which conditions may only be
waived by mutual agreement of the parties hereto:
(i) Consents
All Authorizations and other third-party consents required in connection
with the execution and delivery of this Agreement and the performance of the
obligations hereunder shall have been made or obtained.
(ii) Employment, Non-Competition and Other Agreements
(A) The existing employment agreements by and between each of Barbo and
Daniels, on the one hand, and Management Company, on the other, shall have
been terminated, (B) the 1983 Agreements shall have been terminated, and (C)
and Barbo shall have entered into a noncompetition agreement with Shurgard
REIT, substantially in the form attached hereto as Exhibit D.
(iii) Exchange Listing
The approval for the listing on the Exchange of the Shurgard REIT Common
Shares issuable in the Merger, subject to official notice of issuance, shall
have been obtained.
(iv) Restrictions on Resale of Share Consideration and Contingent Shares
Barbo, Buerk, Daniels, Michael Rowe, David K. Grant, and R. Knutzen, as
Trustee of the Barbo Trust, each shall have entered into an agreement with
Shurgard REIT pursuant to which they each shall have agreed not to sell,
pledge on a non-recourse basis, transfer and otherwise
39
<PAGE>
dispose of (except by operation of law) more than 40% of the Share
Consideration or the Contingent Shares received for a two-year period
commencing upon the Closing Date, without the written consent of Shurgard
REIT and the Representatives. Such agreement shall provide that the
certificates reflecting such Share Consideration and Contingent Shares
issued to such Management Company shareholders pursuant to this Agreement,
or any securities that may be paid as a dividend or otherwise distributed
thereon or with respect thereto or issued or delivered in exchange or
substitution therefor, shall bear a legend reflecting such restrictions on
transfer, provided, that certificates issued after the two-year period has
expired need not bear such legend.
8.2 CONDITIONS TO OBLIGATIONS OF MANAGEMENT COMPANY TO EFFECT THE MERGER
The obligation of Management Company to effect the Merger shall be subject
to the fulfillment at or prior to the Closing Date of the following conditions,
unless waived in writing by Management Company:
(a) Shurgard REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of Shurgard REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date as
if made on the Closing Date (except for changes therein contemplated or
permitted by this Agreement), and Management Company shall have received a
certificate of the President of Shurgard REIT, dated the Closing Date,
certifying to such effect.
(b) Management Company shall have received the opinion of Riddell,
Williams, Bullitt & Walkinshaw ("Riddell") addressed to Management Company
and dated the effective date of the InterMation Spin-Off, to the effect that
the InterMation Spin-Off more likely than not qualifies for tax-free
treatment under Section 355 of the Code, in form and substance reasonably
acceptable to counsel for Shurgard REIT (the "InterMation Spin-Off
Opinion"). Such opinion shall provide that Management Company and its
successors, including Shurgard REIT, shall be entitled to rely on such
opinion.
(c) Management Company shall have received from Perkins Coie, an
opinion, dated the Closing Date as to the matters set forth on Exhibit E.
(d) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of Shurgard REIT and its Subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Shurgard REIT Material
Adverse Effect.
(e) Any sums then due and owing to Management Company by Shurgard REIT
as a result of obligations arising out of (i) that certain Management
Services Agreement dated as of March 1, 1994 between Management Company and
Shurgard REIT and (ii) that certain Advisory Agreement dated as of March 1,
1994 between Management Company and Shurgard REIT shall have been paid.
8.3 CONDITIONS TO OBLIGATION OF SHURGARD REIT TO EFFECT THE MERGER
The obligations of Shurgard REIT to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions,
unless waived in writing by Shurgard REIT:
(a) Management Company shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Closing Date and
the representations and warranties of Shurgard REIT contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date (except for changes therein
contemplated or permitted by this Agreement), and Shurgard REIT shall have
received a certificate of the President of Management Company, dated the
Closing Date, certifying to such effect.
(b) Shurgard REIT shall have received the opinion of Perkins Coie, in
form and substance reasonably acceptable to counsel for the Special
Committee, to the effect that the Merger will be
40
<PAGE>
treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code and each of Shurgard REIT and
Management Company will be a party to that reorganization within the meaning
of Section 368(b) of the Code such that Management Company will not
recognize gain as a result of the Merger.
(c) The InterMation Spin-Off Opinion shall have been delivered.
(d) Shurgard REIT shall have received from Riddell an opinion, dated the
Closing Date, as to the matters set forth on Exhibit F.
(e) Shurgard REIT shall have received an "agreed-upon procedures" report
from Deloitte & Touche LLP, independent public accountants for Management
Company, dated as of a date within two business days before the date on
which the S-4 Registration Statement shall become effective, with respect to
the financial statements of Management Company included in the Proxy
Statement/Prospectus, in form and substance reasonably satisfactory to
Shurgard REIT, and customary in scope and substance for "agreed-upon
procedures" reports delivered by independent public accountants in
connection with registration statements and proxy statements similar to the
S-4 Registration Statement and the Proxy Statement/Prospectus.
(f) Shurgard REIT shall have received the Closing Statement, conforming
to the requirements of Section 4.1(d)(ii)(A) hereof, within five (5) days
prior to the Closing Date.
(g) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of Management Company and its Subsidiaries, taken as a whole,
that would have or would be reasonably likely to have a Management Company
Material Adverse Effect.
(h) Holders in excess of 10% of the Shares outstanding immediately prior
to the Closing shall not have exercised dissenters' rights under applicable
law.
(i) The InterMation Spin-Off described in Section 7.10 above shall have
occurred.
(j) The disposition of Shurgard Realty Advisors described in Section
7.11 above shall have occurred.
(k) Shurgard Realty Advisors shall have executed and delivered the SRA
Letter.
(l) All assignments or other consents necessary to transfer to the
Surviving Corporation the Management Company Intellectual Property Rights
set forth on the Management Company Disclosure Statement shall have been
obtained.
(m) The Closing Statement shall reflect ownership by Management Company
of the Minimum Working Capital.
ARTICLE 9
TERMINATION
9.1 TERMINATION BY MUTUAL CONSENT
This Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time, before or after the approval by shareholders or
stockholders of Management Company or Shurgard REIT, respectively, either by the
mutual written consent of Shurgard REIT and Management Company, or by mutual
action of their respective Boards of Directors.
9.2 TERMINATION BY EITHER SHURGARD REIT OR MANAGEMENT COMPANY
This Agreement may be terminated and the Merger may be abandoned by action
of the Board of Directors of Management Company or Shurgard REIT if (a) the
Merger shall not have been consummated by May 25, 1995, (b) the Management
Company Shareholders Meeting duly shall have been
41
<PAGE>
convened and held and the approval of Management Company's shareholders required
by Section 7.3(a) shall not have been obtained at such meeting or at any
adjournment thereof, (c) the Shurgard REIT Stockholders Meeting duly shall have
been convened and held and the approval of Shurgard REIT's stockholders required
by Section 7.3(b) shall not have been obtained at such meeting or at any
adjournment thereof, or (d) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and non-appealable,
provided, that the party seeking to terminate this Agreement pursuant to this
clause (d) shall have used all reasonable efforts to remove such order, decree,
ruling or injunction; and provided, in the case of a termination pursuant to
clause (a) above, that the terminating party shall not have breached in any
material respect its obligations under this Agreement in any manner that shall
have proximately contributed to the occurrence of the failure referred to in
said clause.
9.3 EFFECT OF TERMINATION AND ABANDONMENT
In the event of termination of this Agreement and abandonment of the Merger
pursuant to this Article 9, no party hereto (or any of its directors or offices)
shall have any liability or further obligation to any other party to this
Agreement, except that nothing herein will relieve any party from liability for
any breach of this Agreement.
ARTICLE 10
MISCELLANEOUS AND GENERAL
10.1 EXPENSES
Each party shall bear its own expenses, including the fees and expenses of
any attorneys, accountants, investment bankers, brokers, finders or other
intermediaries or other Persons engaged by it, incurred in connection with this
Agreement and the transactions contemplated hereby. Notwithstanding the
immediately preceding sentence, in the event that one or more of Management
Company, its officers, directors or Affiliates shall be involuntarily be made
party (collectively, the "Litigation Parties") to any suit, action or proceeding
commenced by any Governmental Body or by any Shurgard REIT stockholder or other
person and seeking to restrain restrict or impede the consummation of the Merger
or seeking damages or other relief in, connection therewith, Shurgard REIT shall
defend, indemnify and hold all such Litigation Parties harmless from all costs,
expenses, losses and liabilities incurred in connection with any such suit,
action or proceeding, including, without limitation, advancement of all legal
and other costs associated with the defense thereof and all liabilities incurred
by way of settlement or final judgment or decree, provided that: (a) each of
such Litigation Parties shall, in the event that it deems conflict or fiduciary
considerations make such necessary or advisable, have the right to retain
separate counsel and to conduct and control its own defense in such suit, action
or proceeding, and all legal and other costs associated with such separate
defense shall likewise be paid in full by Shurgard REIT by advancement or by
reimbursement promptly after submission of invoices relating thereto to Shurgard
REIT; (b) no settlement of any such suit, action or proceeding shall be entered
into by Shurgard REIT without the express written consent of each of the
Litigation Parties, which consent, in the case of any proposed settlement
imposing solely monetary sanctions which are to be paid in full on the
settlement date by Shurgard REIT and releasing the Litigation Parties from any
further liability or participation in such suit, action or proceeding, shall not
be unreasonably withheld; (c) no Litigation Party shall enter into any
settlement of any such suit, action or proceeding for which settlement such
Litigation Party intends to seek indemnification from Shurgard REIT hereunder,
without the express written consent of Shurgard REIT; and (d) Shurgard REIT
shall have no duty to indemnify any Litigation Party for any liability imposed
under any final judgment or decree to the extent that such liability has been
finally adjudicated to have been the result of (i) an untrue statement of or
omission of material fact by Management Company in those sections of the S-4
42
<PAGE>
Registration Statement or the Proxy Statement/Prospectus specified in Section
5.21 hereof, in violation of said Section 5.21, or (ii) fraud, intentional
misconduct or knowing violation of law by such Litigation Party."
10.2 NOTICES, ETC.
All notices, requests, demands or other communications required by or
otherwise with respect to this Agreement shall be in writing and shall be deemed
to have been duly given to any party when delivered personally (by courier
service or otherwise), when delivered by facsimile and confirmed by return
facsimile, or seven days after being mailed by first-class mail, postage prepaid
and return receipt requested in each case to the applicable addresses set forth
below:
<TABLE>
<S> <C>
If to Management Company: with a copy to:
Shurgard Incorporated Riddell, Williams, Bullitt & Walkinshaw
Suite 2200 1001 4th Avenue Plaza,
1201 Third Avenue Suite 4400
Seattle, WA 98101 Seattle, WA 98104
Attention: Charles K. Barbo Attention: John M. Steel
Facsimile: (206) 624-1645 Facsimile: (206) 389-1708
If to Shurgard REIT: with a copy to:
Shurgard Storage Centers, Inc. Perkins Coie
Suite 2200 1201 Third Avenue, Suite 4000
1201 Third Avenue Seattle, WA 98104
Seattle, WA 98101 Attention: Michael E. Stansbury
Attention: Harrell Beck Facsimile: (206) 583-8500
Facsimile: (206) 624-1645
</TABLE>
or to such other address as such party shall have designated by notice so given
to each other party.
10.2 SURVIVAL
The covenants, agreements, representations and warranties of the parties
hereto contained in this Agreement or in any certificate or other writing
delivered pursuant hereto or in connection herewith shall survive the Closing
through the second anniversary of the Closing Date, except in the case of
Sections 5.8, 5.10, and 7.17, which in each such case shall survive through the
fourth anniversary of the Closing Date. Notwithstanding the preceding sentence,
any covenant, agreement, representation or warranty in respect of which
indemnity may be sought pursuant to Section 4.8 shall survive the time at which
it would otherwise terminate pursuant to the preceding sentence, if written
notice of the inaccuracy or breach thereof, specifying Damages (including the
amount thereof) giving rise to such right to indemnity shall have been given to
the party against whom such indemnity may be sought prior to such time.
10.3 AMENDMENTS, WAIVERS, ETC.
This Agreement may not be amended, changed, supplemented, waived or
otherwise modified except by an instrument in writing signed by the party
against whom enforcement is sought.
10.4 NO ASSIGNMENT
This Agreement shall be binding upon and shall inure to the benefit of and
be enforceable by the parties and their respective successors and assigns;
provided that, except as otherwise expressly set forth in this Agreement,
neither the rights nor the obligations of any party may be assigned or delegated
without the prior written consent of the other party.
10.5 ENTIRE AGREEMENT
Except as otherwise provided herein, this Agreement embodies the entire
agreement and understanding between the parties relating to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter. There are no representations, warranties
43
<PAGE>
or covenants by the parties hereto relating to such matter other than those
expressly set forth in this Agreement (including the Management Company
Disclosure Statement and the Shurgard REIT Disclosure Statement) and any
writings expressly required hereby.
10.6 SPECIFIC PERFORMANCE
The parties acknowledge that money damages are not an adequate remedy for
violations of this Agreement and that any party may, in its sole discretion,
apply to a court of competent jurisdiction for specific performance or
injunctive or such other relief as such court may deem just and proper to
enforce this Agreement or to prevent any violation hereof.
10.7 REMEDIES CUMULATIVE
All rights, powers and remedies provided under this Agreement or otherwise
available in respect hereof at law or in equity shall be cumulative and not
alternative, and the exercise or beginning of the exercise of any thereof by any
party shall not preclude the simultaneous or later exercise of any other such
right, power or remedy by such party.
10.8 NO WAIVER
The failure of any party hereto to exercise any right, power or remedy
provided under this Agreement or otherwise available in respect hereof at law or
in equity, or to insist upon compliance by any other party hereto with its
obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof, shall not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance.
10.9 NO THIRD-PARTY BENEFICIARIES
This Agreement is not intended to be for the benefit of and shall not be
enforceable by any Person or entity who or which is not a party hereto.
10.10 JURISDICTION
Each party hereby irrevocably submits to the exclusive jurisdiction of the
United States District Court for the Western District of Washington or any court
of the state of Washington located in the City of Seattle in any action, suit or
proceeding arising in connection with this Agreement, and agrees that any such
action, suit or proceeding shall be brought only in such court (and waives any
objection based on forum non conveniens or any other objection to venue
therein); PROVIDED, HOWEVER, that such consent to jurisdiction is solely for the
purpose referred to in this Section 10.10 and shall not be deemed to be a
general submission to the jurisdiction of said courts or in the state of
Washington other than for such purpose. Each of the parties hereby waives any
right to a trial by jury in connection with any such action, suit or proceeding.
10.11 GOVERNING LAW
This Agreement and all disputes hereunder shall be governed by and construed
and enforced in accordance with the internal laws of the state of Washington,
without regard to principles of conflict of laws.
10.12 NAME, CAPTIONS, ETC.
The name assigned to this Agreement and the section captions used herein are
for convenience of reference only and shall not affect the interpretation or
construction hereof. Unless otherwise specified (a) the terms "hereof," "herein"
and similar terms refer to this Agreement as a whole and (b) references herein
to Articles or Sections refer to articles or sections of this Agreement.
10.13 SEVERABILITY
If any term of this Agreement or the application thereof to any party or
circumstance shall be held invalid or unenforceable to any extent, the remainder
of this Agreement and the application of such term to the other parties or
circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by applicable law, provided that in such event the
parties shall negotiate in
44
<PAGE>
good faith in an attempt to agree to another provision (in lieu of the term or
application held to be invalid or unenforceable) that will be valid and
enforceable and will carry out the parties' intentions hereunder.
10.14 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one instrument. Each counterpart may consist of a number of copies, each signed
by less than all, but together signed by all, the parties hereto.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties set forth below.
SHURGARD STORAGE CENTERS, INC., a
Delaware Corporation
By: /s/ HARRELL L. BECK
------------------------------------
Harrell L. Beck, President
SHURGARD INCORPORATED,
a Washington Corporation
By: /s/ CHARLES K. BARBO
------------------------------------
Charles K. Barbo, President
45
<PAGE>
APPENDIX II
DECEMBER 19, 1994
Special Committee of the Board of Directors
of Shurgard Storage Centers, Inc.
c/o Bogle & Gates
Two Union Square
601 Union Street
Seattle, Washington 98101-2346
Dear Sirs:
Shurgard Storage Centers, Inc. ("SSCI") and Shurgard Incorporated
("Shurgard") have entered into an Agreement and Plan of Merger, dated as of
December 19, 1994 (the "Agreement"). Pursuant to the Agreement, Shurgard will be
merged with SSCI (the "Merger"), the consideration for which will be primarily
the issuance of shares of common stock of SSCI. Additional consideration, in the
form of additional shares of common stock of SSCI, may be issued based upon the
profits realized, if any, by SSCI with respect to Shurgard's interest in certain
limited partnerships. You have requested our opinion as to whether the
consideration to be paid for the acquisition of Shurgard is fair, from a
financial point of view, to SSCI.
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for estate, corporate and other purposes. We have
acted as financial advisor to the Special Committee of the Board of Directors of
SSCI in connection with the Merger and have received a fee for our services.
Alex. Brown & Sons Incorporated regularly publishes research reports regarding
the real estate and real estate investment trust industries and the businesses
and securities of publicly owned companies in those industries.
In connection with our opinion, we have: (i) reviewed certain publicly
available information regarding SSCI, (ii) reviewed certain internal financial
analyses and other information furnished to us by SSCI, (iii) discussed the
business of and prospects for SSCI with management of SSCI, (iv) reviewed the
price and trading volume of the common stock of SSCI, (v) reviewed certain
internal financial analyses and other information furnished to us by Shurgard,
(vi) discussed the business of and prospects for Shurgard with management of
Shurgard, (vii) reviewed valuations of Shurgard provided to us, (viii) compared
certain financial information of Shurgard with similar information of certain
private and public companies engaged in the real estate management or financial
services industries, (ix) reviewed the financial terms of certain other business
combinations, (x) reviewed certain pro forma analyses and held discussions with
the management of SSCI and Shurgard regarding the business and prospects of SSCI
after the completion of the Merger, (xi) visited certain Shurgard-managed
self-storage centers, and (xii) performed such other studies and analyses and
considered such other factors as we deemed appropriate.
We have not independently verified the information described above and for
the purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the prospects of SSCI
after the Merger, we have assumed that such information reflects the best
currently available estimates and judgments of the managements of SSCI and
Shurgard as to the likely future financial performance of SSCI. In addition, we
have not made an independent evaluation or appraisal of the assets of SSCI, the
assets of Shurgard or reviewed environmental or other potential contingent
issues relating to SSCI, Shurgard or the Merger. Our opinion is based on market,
economic and other conditions as they exist and can be evaluated as of the date
of this letter.
<PAGE>
Special Committee of the Board of Directors
of Shurgard Storage Centers, Inc.
December 19, 1994
Page 2
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the consideration to be paid for the acquisition of
Shurgard is fair, from a financial point of view, to SSCI.
Very truly yours
ALEX. BROWN & SONS INCORPORATED
By: Alex. Brown & Sons Incorporated
------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
2.1* Agreement and Plan of Merger dated as of December 19, 1994 (included as Appendix
I to the Proxy Statement/Prospectus)
3.1 Amended and Restated Certificate of Incorporation of the Registrant (A)
3.2 Restated By-Laws of the Registrant (A)
4.1 Rights Agreement between the Registrant and Gemisys Corporation dated as of March
17, 1994 (B)
5.1* Opinion of Perkins Coie as to the legality of the securities being registered
8.1 Opinion of Perkins Coie as to certain federal income tax consequences
10.1* Advisory Agreement between Shurgard Storage Centers, Inc. and Shurgard
Incorporated dated as of March 1, 1994
10.2* Management Services Agreement between Shurgard Storage Centers, Inc. and Shurgard
Incorporated dated as of March 1, 1994
10.3* Loan Agreement among Shurgard Storage Centers, Inc., Seattle-First National Bank,
Key Bank of Washington and West One Bank dated August 19, 1994
10.4* Amended and Restated Loan Agreement between Nomura Asset Capital Corp., as
Lender, and SSC Property Holdings, Inc., as Borrower, dated as of June 8, 1994
10.5* Amended and Restated Collection Account and Servicing Agreement among SSC
Property Holdings, Inc., Pacific Mutual Life Insurance Company, LaSalle National
Bank and Nomura Asset Capital Corp. dated as of June 8, 1994
10.6* Revolving Loan Agreement among Shurgard Storage Centers, Inc., SSC Acquisitions,
Inc. and Normura Asset Capital Corp. dated as of December 23, 1994
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP (see page II-4)
23.2* Consent of Alex. Brown & Sons Incorporated
23.3* Consent of Riddell, Williams, Bullitt & Walkinshaw
23.4* Consent of Bogle & Gates
23.5* Consent of Perkins Coie (also contained in the opinions filed as Exhibits 5.1 and
8.1 hereto)
24.1* Power of Attorney
99.1* Form of Proxy for special meeting of shareholders of the Registrant
<FN>
- ------------------------
* Previously filed
(A) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-4, Amendment No. 8 (Post-Effective
Amendment No. 4), filed with the Securities and Exchange Commission on
February 2, 1994
(B) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on March 17, 1994
</TABLE>
II-1
<PAGE>
(b) Schedules
Not applicable
(c) Reports, Opinions and Appraisals
Opinion of Alex. Brown & Sons Incorporated (included as Appendix II to
the Proxy Statement/Prospectus)
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 14th day of February, 1995.
SHURGARD STORAGE CENTERS, INC.
By Harrell L. Beck
-----------------------------------------
Harrell L. Beck, President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 14th day of February, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------- --------------------------------------
<C> <S>
President, Treasurer, Chief Financial
Harrell L. Beck Officer and Director (Principal
- -------------------------------------- Executive Officer and Principal
Harrell L. Beck Financial and Accounting Officer)
Dan Kourkoumelis*
- -------------------------------------- Director
Dan Kourkoumelis
Donald W. Lusk*
- -------------------------------------- Director
Donald W. Lusk
W.J. (Jim) Smith*
- -------------------------------------- Director
W.J. (Jim) Smith
*By: Harrell L. Beck
---------------------------------
Harrell L. Beck, Attorney-In-Fact
</TABLE>
II-3
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to use in this Amendment No. 3 to Registration Statement No.
33-57047 of Shurgard Storage Centers, Inc. of our report dated December 16, 1994
on the financial statements of Shurgard Storage Centers, Inc. as of and for the
period ended December 31, 1993, our report dated December 16, 1994 on the
financial statements of the Management Company as of and for the year ended
December 31, 1993, and our report dated December 16, 1994 on the combined
financial statements of 17 limited partnerships therein described as of December
31, 1993 and 1992 and for each of the three years in the period ended December
31, 1993, appearing in the Proxy Statement/Prospectus, which is a part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Proxy Statement/Prospectus.
DELOITTE & TOUCHE LLP
Seattle, Washington
February 13, 1995
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
2.1* Agreement and Plan of Merger dated as of December 19, 1994 (included as Appendix
I to the Proxy Statement/Prospectus)
3.1 Amended and Restated Certificate of Incorporation of the Registrant (A)
3.2 Restated By-Laws of the Registrant (A)
4.1 Rights Agreement between Shurgard Storage Centers, Inc. and Gemisys Corporation
dated as of March 17, 1994 (B)
5.1* Opinion of Perkins Coie as to the legality of the securities being registered
8.1 Opinion of Perkins Coie as to certain federal income tax consequences
10.1* Advisory Agreement between Shurgard Storage Centers, Inc. and Shurgard
Incorporated dated as of March 1, 1994
10.2* Management Services Agreement between Shurgard Storage Centers, Inc. and
Shurgard Incorporated dated as of March 1, 1994
10.3* Loan Agreement among Shurgard Storage Centers, Inc. and Seattle-First National
Bank, Key Bank of Washington and West One Bank dated August 19, 1994
10.4* Amended and Restated Loan Agreement between Nomura Asset Capital Corp., as
Lender, and SSC Property Holdings, Inc., as Borrower, dated as of June 8, 1994
10.5* Amended and Restated Collection Account and Servicing Agreement among SSC
Property Holdings, Inc., Pacific Mutual Life Insurance Company, LaSalle
National Bank and Nomura Asset Capital Corp. dated as of June 8, 1994
10.6* Revolving Loan Agreement among Shurgard Storage Centers, Inc., SSC Acquisitions,
Inc. and Normura Asset Capital Corp. dated December 23, 1994
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP (see page II-4)
23.2* Consent of Alex. Brown & Sons Incorporated
23.3* Consent of Riddell, Williams, Bullitt & Walkinshaw
23.4* Consent of Bogle & Gates
23.5* Consent of Perkins Coie (also contained in the opinions filed as Exhibits 5.1
and 8.1 hereto)
24.1* Power of Attorney
99.1* Form of Proxy for special meeting of shareholders of the Registrant
<FN>
- ------------------------
* Previously filed
(A) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-4, Amendment No. 8 (Post-Effective
Amendment No. 4), filed with the Securities and Exchange Commission on
February 2, 1994
(B) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on March 17, 1994
</TABLE>
<PAGE>
PERKINS COIE
A Law Partnership Including Professional Corporations
1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099
Telephone (206) 583-8908 Facsimile (206) 583-8500
February 14, 1995
Shurgard Storage Centers, Inc.
1201 Third Ave., Suite 2200
Seattle, WA 98101
Shurgard Incorporated
1201 Third Ave., Suite 2200
Seattle, WA 98101
RE: MERGER OF THE MANAGEMENT COMPANY INTO THE SHURGARD REIT
Ladies and Gentlemen:
We have been asked as counsel to Shurgard Storage Centers, Inc., a Delaware
corporation (the "Shurgard REIT"), to render this opinion pursuant to the
Agreement and Plan of Merger, dated as of December 19, 1994, including all
amendments relating thereto (the "Agreement"), by and among the Shurgard REIT
and Shurgard Incorporated, a Washington corporation (the "Management Company").
Capitalized terms not otherwise defined herein shall have the same meanings
given to them in the Proxy Statement/Prospectus (the "Proxy
Statement/Prospectus") that is part of the Registration Statement on Form S-4 of
Shurgard covering the shares of Shurgard REIT Class A Common Stock to be issued
in the Merger.
In connection with this opinion, we have examined the originals,
photocopies or certified copies of the Agreement, and all such other documents
we have deemed necessary or appropriate as a basis for the opinions hereinafter
set forth. In such examination, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals
and the conformity to the original documents of all documents submitted to us as
photocopies or certified copies. We have relied, as to matters of fact, solely
upon statements and representations by officers and representatives of the
Shurgard REIT and the Management Company, including those statements and
representations contained in that certain Shurgard REIT Officers' Certificate,
dated as of the date hereof, and that certain Shurgard Management Company
Officers' Certificate, dated as of the date hereof, as well as those statements
and representations made by Charles K. Barbo, Arthur W. Buerk, Donald B.
Daniels, Michael Rowe, David K. Grant, the Barbo Trust), dated as of the date
hereof (collectively, the "Significant Management Company Shareholders"), in
those certain Management Company Significant Shareholder's Certificates (such
certificates collectively referred to as the "Certificates"), and the
assumptions stated therein. Without the Certificates we would not render this
opinion.
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 2
In rendering this opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"),
and other U.S. federal tax statutes, the Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
Furthermore, we have examined (1) the Agreement (including the exhibits
thereto), (2) the Proxy Statement/Prospectus and (3) such other documents as we
deemed relevant. In our examination of these documents, we have assumed (i) the
authenticity of original documents and the accuracy of copies of documents, that
signatures are genuine and the capacity of each party executing a document to
so execute such document, and (ii) in the case of any unsigned documents, that
the documents have been or will be duly executed in the form reviewed by us.
I. DESCRIPTION OF THE MERGER
Our opinion is based upon the following facts as more fully described in
the Proxy Statement/Prospectus. In the Merger, the Management Company will be
merged with and into the Shurgard REIT. The separate corporate existence of the
Management Company will terminate and the Shurgard REIT will be the surviving
corporation. Management Company shareholders owning 100% of the shares of the
Management Company Common Stock outstanding immediately prior to the Effective
Time of the Merger, other than Management Company shareholders exercising their
appraisal rights, will exchange their shares of Management Company Common Stock
for Shurgard REIT Class A Common Stock.
II. FACTUAL ASSUMPTIONS
For purposes of this opinion, we have assumed the following:
A. At the Effective Time of the Merger, the Shurgard REIT does not own,
beneficially or of record, any stock or securities of the Management Company;
B. The Shurgard REIT Class A Common Stock to be issued to the Management
Company shareholders in the Merger and pursuant to the Agreement will be voting
stock and will not be subject to a put or call;
C. There is no plan or intention by the shareholders of the Management
Company to sell, exchange or otherwise dispose of a number of shares of the
Shurgard REIT Class A Common Stock received in the Merger that would reduce the
Management Company shareholders' ownership of the Shurgard REIT Class A Common
Stock to a number of shares having a value, as of the Effective Time of the
Merger, of less than 50% of the value of all the formerly outstanding shares of
the Management Company Common Stock as of the same date. For purposes of this
assumption, shares of Management Company Common Stock exchanged
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 3
for cash or other property, surrendered by dissenters, or exchanged for cash in
lieu of fractional shares of the Shurgard REIT Class A Common Stock will be
treated as outstanding Management Company Common Stock on the date of the
Merger. Moreover, shares of Management Company Common Stock and shares of the
Shurgard REIT Class A Common Stock held by the Management Company shareholders
and otherwise sold, redeemed or disposed of prior or subsequent to the Merger
will be considered in making this assumption. Finally, shares of Shurgard REIT
Class A Common Stock exchanged for shares of Management Company Common Stock
received upon the exercise of options to purchase Management Company Common
Stock after February 23, 1994 are ignored for purposes of this assumption.
D. The Shurgard REIT has no plan or intention to liquidate or to sell or
otherwise dispose of any of the assets of the Management Company acquired in the
Merger, except in the ordinary course of business or pursuant to transfers
described in section 368(a)(2)(C) of the Code, and intends to continue after the
Merger, in a substantially unchanged manner, each line of business the
Management Company conducted prior to the Merger other than those lines of
business disposed of in the InterMation Spin-off;
E. The Shurgard REIT, the Management Company, the Shurgard REIT
stockholders and the Management Company shareholders will pay their respective
expenses incurred in connection with the Merger and the other transactions
contemplated by the Agreement;
F. Less than 80% of the total value of the assets of the Management
Company assets is attributable to assets held for investment within the meaning
of section 368(a)(2)(F) of the Code and less than 50% of the total value of the
assets of the Management Company are "stock and securities" within the meaning
of section 368(a)(2)(F) of the Code, including as "stock and securities" for
these purposes the Shurgard REIT Class A Common Stock held by the Management
Company and the Contingent Partnerships;
G. The aggregate number of shares of Shurgard REIT Class A Common Stock
issued (a) as Contingent Shares under Sections 4.1(a)(ii) and 4.7 of the
Agreement and (b) as a result of any Under-Statement pursuant to Section
4.1(d)(ii)(D) of the Agreement shall not exceed the aggregate number of shares
of Shurgard REIT Class A Common Stock issued as Share Consideration at the
Effective Time pursuant to Section 4.1(a)(i) of the Agreement, as adjusted
pursuant to Section 4.1(d) of the Agreement, excluding any additional shares of
Shurgard REIT Class A Common Stock issued as a result of an Under-Statement
pursuant to Section 4.1(d)(ii)(D) of the Agreement;
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 4
H. The Merger will be effected pursuant to the corporation laws of the
States of Washington and Delaware, as described in Section 2.1 of the Agreement;
and
I. Such other matters set forth in the Certificates.
III. DISCUSSION
A. STATUTORY REQUIREMENTS FOR REORGANIZATION STATUS
In order for tax-free treatment to apply to the Shurgard REIT Class A
Common Stock received by shareholders of the Management Company in the Merger,
the Merger must qualify as a reorganization under section 368(a) of the Code.
1. STATUTORY MERGER
A "statutory merger or consolidation" is included within the meaning of a
"reorganization" by virtue of section 368(a)(1)(A) of the Code. Treasury
Regulations section 1.368-2(b)(1) provides that "[i]n order to qualify as a
reorganization under Section 368(a)(1)(A) the transaction must be a merger or
consolidation effected pursuant to the corporation laws of the United States or
a State or Territory or the District of Columbia." For purposes of this
opinion, we are assuming that the Merger will be effected pursuant to the
corporation laws of the State of Washington and the State of Delaware, which
assumption is consistent with Section 2.1 of the Agreement. Accordingly, we are
satisfied that the Merger will be a merger or consolidation under section
368(a)(1)(A) of the Code.
2. INVESTMENT COMPANIES
Section 368(a)(2)(F) of the Code provides that a Merger will not qualify as
a reorganization under section 368(a)(1) of the Code if two or more parties to
the transaction are investment companies. Section 368(a)(2)(F)(iii) of the Code
defines an investment company to be any of (a) a regulated investment company,
(b) a real estate investment trust or (c) a corporation 50% or more of the value
of whose total assets are stock and securities and 80% or more of the value of
whose total assets are assets "held for investment." Because it is a real
estate investment company, the Shurgard REIT is an investment company within the
meaning of section 368(a)(2)(F) of the Code. Nevertheless, the management of
the Management Company has represented that less than 80% of the total value of
the assets of the Management Company assets is attributable to assets held for
investment within the meaning of section 368(a)(2)(F) of the Code and less than
50% of the total value of the assets of the Management Company are "stock and
securities" within the meaning of section 368(a)(2)(F) of the Code, including as
"stock and securities" for these purposes the
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 5
interest of the Management Company in the Shurgard REIT Class A Common Stock and
the Contingent Partnerships. Therefore, we are satisfied that the Merger will
not contain two or more parties that are investment companies, and that no party
to the reorganization will recognize gain under this rule.
B. JUDICIAL, ADMINISTRATIVE AND REGULATORY REQUIREMENTS
In addition to the statutory requirements, the Merger must also satisfy
several judicial, administrative and regulatory requirements to qualify as a
reorganization under section 368(a) of the Code.
1. CONTINUITY OF INTEREST
First among these nonstatutory requirements is the judicial continuity of
interest doctrine, which concerns itself with the character and extent of the
continuing relationship of the former shareholders of the acquired company to
the corporation acquiring their interests. While no precise formula has been
expressed for determining whether there has been retention of the requisite
interest, it seems clear that there must be a showing: (i) that the transferor
corporation or its shareholders retained a substantial proprietary stake in the
enterprise represented by a material interest in the affairs of the transferee
corporation and (ii) that such retained interest represents a substantial part
of the value of the property transferred. SOUTHWEST NATURAL GAS CO. V.
COMMISSIONER, 189 F.2d 332 (5th Cir. 1951), CERT. DENIED, 342 U.S. 860 (1951).
As to the nature of the consideration, after having reviewed the material terms
of the Shurgard REIT Class A Common Stock, we are satisfied that such stock
interest will constitute a qualifying proprietary interest in the Shurgard REIT
for purposes of this requirement.
In regard to the substantiality of that interest, the continuity of
interest test has usually focused on the percentage of the total consideration
received and retained by the historic shareholders of the acquired corporation
that represents an equity interest in the acquiring corporation. In NELSON V.
HELVERING, 296 U.S. 374 (1935), the Supreme Court held that requisite continuity
was found where that percentage was approximately 38%. This standard is the
most authoritative precedent on this issue to date. For purposes of issuing a
favorable advance ruling, the IRS imposes a more stringent standard, namely,
that the stock of the acquiring corporation used as consideration be "equal in
value, as of the effective date of the reorganization, to at least 50 percent of
the value of all the formerly outstanding stock of the acquired or transferor
corporation as of the same date." Rev. Proc. 77-37, 1977-2 C.B. 568,
Section 3.02. For purposes of this standard, stock surrendered by dissenters or
exchanged for cash in lieu of fractional shares is to be treated as outstanding
stock of the acquired corporation on the date of the transaction. ID. We have
considered the following issues with respect to the
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 6
percentage of Shurgard REIT Class A Common Stock received and retained by the
Management Company shareholders as a result of the Merger.
a. MANAGEMENT COMPANY OPTIONS. Immediately prior to the
Effective Time all the unvested Management Company Options will vest, enabling
holders to exercise such options in exchange for shares of Management Company
Common Stock and to then exchange their Management Company Common Stock for
Shurgard REIT Class A Commons Shares in the Merger. Under the federal income
tax laws it is unclear to what extent shares of the Management Company Common
Stock issued with respect to options exercised after February 23, 1994 (the
final day of the voting period regarding the formation of the Shurgard REIT) can
be considered to have been held by historic Management Company Shareholders.
Nevertheless, because such shares would constitute less than 10% of the total
number of shares of Management Company Common Stock (assuming exercise of all
Management Company Options described in the Proxy Statement/Prospectus), their
existence should not prevent the Merger from meeting the continuity of
shareholder interest requirement.
b. CONTINGENT SHARES. Under the Agreement, the Shurgard REIT
may issue a number of shares of Shurgard REIT Class A Common Stock (the
"Contingent Shares") to the Management Company Shareholders as Merger
consideration for the first five years ending after the Effective Time. The IRS
will rule that the subsequent delivery of additional shares through contingent
stock arrangements will not adversely affect a reorganization otherwise
qualifying under section 368(a) of the Code, including the continuity of
shareholder interest requirement,(1) provided that the following requirements
(the "Contingent Stock Guidelines") are met: (i) the contingent stock will
settle within five years; (ii) there is a valid business purpose for the
arrangement; (iii) the maximum number of Contingent Shares will not exceed the
number of shares issued in the initial distribution; (iv) the number of
Contingent Shares is based upon an objective and readily ascertainable formula;
(v) the triggering event for payment of the contingent shares is not within the
control of recipient shareholders; (vi) the arrangement limits the maximum
number of contingent shares that may be issued, (vii) such stock issuance is not
triggered by the payment of additional tax or reduction in tax paid as a result
of an IRS audit either (A) related to the reorganization or (B) when the
reorganization involves persons related within the meaning of section 267(c)(4)
of the Code; (viii) the rights to the Contingent Shares are not assignable,
other than by operation of law, or, alternatively, the right to the contingent
shares is not evidenced by negotiable instruments of any kind, and (ix) such
right can give rise only to the receipt of
- --------------------
(1) As noted INFRA at Section III B.1.d, however, a portion of the shares
may be recharacterized as interest.
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 7
additional stock of the corporation making the underlying distribution. See
Rev. Proc. 84-42, 1981-1 C.B. 521.
The Contingent Share arrangement offered to the Management Company
shareholders meets all of the Contingent Stock Guidelines, with two exceptions.
First, the period during which Contingent Shares may be issued may extend for
between five and six years (and possibly a greater period if the parties are
unable to agree on an appraiser so that the matter is before the presiding judge
of the Superior Court in King County Washington). This contradicts requirement
(i) of the Contingent Stock Guidelines, which mandates that the period not
exceed five years. Nonetheless, the case law is considered more lenient in this
regard, and supports the use of a contingent share period in excess of five
years. SEE CARLBERG V. UNITED STATES, 281 F.2d 507, 60-2, U.S. Tax Cas. (CCH)
PARA 9647, at 77,739 (8th Cir. 1960) (six-year pay-out); HAMRICK V.
COMMISSIONER, 43 T.C. 21, 23 (1964) (seven-year pay-out). Furthermore, the fact
that the pay-out period could, in theory, continue indefinitely when the matter
is before a King County Superior Court judge should not change this result.
AGREEMENT Section 4.7(d)(ii). This will occur only if the parties are unable to
agree on an appraiser, and furthermore, if it does occur, control over the
Contingent Share pay-out period will be entirely outside the control of the
parties. Such an agreement presents no opportunity for an abuse of the five
year limit. CF. Rev. Proc. 84-42, 1981-1 C.B. 521 at Section 2.02(b) (exercise
arrangement may exceed five years due to a "bona fide dispute as to when the
stock should be released").
Second, the Contingent Share arrangement provides for the issuance of cash
in lieu of fractional shares in contrast to requirement (ix). Nevertheless, the
case law in this area is more lenient than the IRS ruling requirements. See
Carlberg, supra, at 77,741 (after 10 years, shareholders who have not collected
contingent shares due will receive cash with an equivalent value). Furthermore,
the IRS has ruled favorably in reorganizations qualifying under section 368(a)
of the Code that utilized cash in lieu of fractional shares when the cash did
not represent separately bargained-for consideration. Rev. Rul. 66-635, 1966-1
C.B. 116 (cash in lieu of fractional shares did not violate "solely for voting
stock" requirement of section 368(a)(1)(B) of Code when not separately
bargained-for consideration). Each of the Management Company Officer's
Certificate and the Certificates contains a representation that the cash in lieu
of fractional shares received under the Agreement does not represent separately
bargained-for consideration. Finally, the amount of cash issued in lieu of
functional shares of Shurgard REIT Class A Common Stock is nominal.
Accordingly, the issuance of cash in lieu of functional shares of Shurgard REIT
Class A Common Stock both at the Effective Time and with respect to the
Contingent Shares should not prevent the reorganization from qualifying under
section 368(a) of the Code. Furthermore, we believe the Contingent Shares
should be treated as Shurgard REIT Class A Common Shares issued in the Merger,
and not as
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 8
"other property" under section 356(a) of the Code, and should not adversely
affect the tax-free nature of the Merger for any party thereto.
c. ESCROW SHARES. Fifteen percent of the aggregate number of
Shares being issued at the Effective Time of the Merger (the "Indemnification
Shares") will be deposited into an escrow account at the Effective Time to allow
the Shurgard REIT to recover from the Indemnification Shares costs or expenses
arising from certain events. The IRS will rule that an escrow arrangement does
not adversely affect a reorganization otherwise qualifying under section 368(a)
of the Code, including the continuity of shareholder interest requirement,
provided that the following requirements are met (the "Escrow Stock
Guidelines"): (i) the escrowed stock will be released within five years (except
when there is a bona fide dispute as to whom the stock should be released);
(ii) there is a valid business purpose for the arrangement; (iii) at least 50%
of the number of shares issued initially to the shareholders (excluding shares
issued under a contingent stock arrangement as set forth above) are not subject
to the arrangement; (iv) the triggering event for return of the escrow shares is
not within the control of recipient shareholders; (v) the stock subject to such
arrangement appears as issued and outstanding on the balance sheet of the
issuing corporation and such stock is legally outstanding under applicable state
law; (vi) all dividends paid on such stock will be distributed currently to the
exchanging shareholders; (vii) all voting rights of such stock (if any) are
exercisable by or on behalf of the shareholders or their authorized agent;
(viii) no shares of such stock are subject to restrictions requiring their
return to the issuing corporation because of death, failure to continue
employment, or similar restrictions; (ix) the mechanism for the calculation of
the number of escrow shares to be returned is based upon an objective and
readily ascertainable formula; and (x) the return of such stock is not triggered
by the payment of additional tax or reduction in tax paid as a result of an IRS
audit either (A) related to the reorganization or (B) when the reorganization
involves persons related within the meaning of section 267(c)(4) of the Code.
See Rev. Proc. 84-42, SUPRA.
The escrow arrangement for the Indemnification Shares meets the Escrow
Stock Guidelines, other than requirement (x). The indemnification arrangement
provides for damages in the event that the InterMation Spin-off does not qualify
under section 355 of the Code, or in the event that the representations and
warranties or covenants and agreements of the Management Company in the
Agreement are incorrect or untrue. AGREEMENT Section 4.8(a) (i)-(iii).
Depending on the circumstances, this could contradict requirement (x)'s
prohibition against using escrow stock to pay an IRS audit tax liability
"related to" the reorganization. For example, the failure of the Merger to
qualify as a reorganization under section 368(a) of the Code may disqualify the
qualification of the InterMation Spin-off under section 355 of the Code, causing
Indemnification Shares to be issued to the Shurgard REIT. Nevertheless, the
purpose of the escrow arrangement is not merely to guard against the
characterization of the
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 9
Agreement as tax-free, but instead to protect against a number of liabilities
that may arise and that are typically covered in merger agreement
indemnification provisions. Tech. Adv. Mem. 7408289000A (Aug. 28, 1974) (escrow
arrangement to "insure performance of certain terms and provisions" of
agreement); KINGSLEY V. COMMISSIONER, 662 F.2d 531, 81-2 U.S. Tax Cas. (CCH)
PARA 9785 at 88,612 (9th Cir. 1981) (escrow for warranties regarding "financial
statements, tax liabilities and insurance claims"). Because of the bona fide
business purpose for the escrow arrangement, we conclude that the
Indemnification Shares should be treated as Shurgard REIT Class A Common Shares
issued in the Merger, and not as "other property" under section 356 of the Code,
and should not adversely affect the tax-free nature of the Merger for the
Management Company or the Shurgard REIT.
d. RECHARACTERIZATION AS INTEREST INCOME. As discussed below
in Section III.C.1. hereof, a portion of the Contingent Shares issued to
Management Company shareholders will be recharacterized as interest income and
taxed to the Management Company shareholders upon their receipt thereof. Rev.
Rul. 70-300, 1970-1 C.B. 123. The portion of the Contingent Shares that are not
so recharacterized will be treated as Shurgard REIT Class A Common Stock issued
in the Merger. Neither the portion of the Contingent Shares recharacterized as
interest or the remaining portion of the Contingent Shares will constitute
"other property" under section 356(a) of the Code. ID. Therefore, the interest
recharacterization should not diminish the percentage value of Shurgard REIT
Class A Common Stock deemed received by the Management Company shareholders in
the Merger, and should not adversely impact the continuity of shareholder
interest requirement.
e. SUMMARY OF CONTINUITY OF INTEREST ANALYSIS. Each of the
management of the Management Company and the Significant Management Company
shareholders has represented that there is no plan or intention by the
shareholders of the Management Company who own 1% or more of the Management
Company Common Stock, and to the best of their knowledge, there is no plan or
intention on the part of the remaining Management Company shareholders to sell,
exchange or otherwise dispose of a number of shares of the Shurgard REIT Class A
Common Stock received in the Merger that would reduce the Management Company
shareholders' ownership of the Shurgard REIT Class A Common Stock to a number of
shares having a value, as of the Effective Time of the Merger, of less than 50%
of the value of all the formerly outstanding shares of the Management Company
Common Stock as of the same date. Based on this and the analysis set forth
above regarding the character of the Shurgard REIT Class A Common Stock issued
in the Merger, we believe that the continuing interests of the Management
Company shareholders who receive the Shurgard REIT Class A Common Stock in the
Merger should be deemed sufficient for purposes of the continuity of shareholder
interest requirement.
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 10
2. CONTINUITY OF BUSINESS ENTERPRISE
Treasury Regulations section 1.368-1 provides that for a reorganization to
qualify under section 368(a) of the Code it must also satisfy a so-called
"continuity of business enterprise" test. The regulation provides that the
acquiring corporation must either continue the historic business of the acquired
corporation or use a significant portion of the historic business assets of the
acquired corporation in its business. The preamble to the final Treasury
Regulations acknowledges that the exact formulation of the continuity of
business enterprise test in the regulation has been criticized and is not
supported by all of the judicial precedents that previously interpreted the
continuity of business enterprise requirement. T.D. 7745, 1981-1 C.B. 134.
Notwithstanding such equivocation, management of the Shurgard REIT has
represented that the Shurgard REIT will continue after the Merger the historic
business of the Management Company or use a significant portion of the
Management Company's historic business assets in a business of the Shurgard
REIT. It has also represented that it does not intend for the Shurgard REIT to
liquidate, sell or otherwise dispose of any of the Management Company's assets
after the Merger, except in the ordinary course of business or in transfers
described in section 368(a)(2)(C) of the Code (transfers to wholly-owned
subsidiaries). Accordingly, we are of the opinion that the continuity of
business enterprise test will be satisfied.
3. BUSINESS PURPOSE
Judicial and regulatory authorities also require a reorganization
qualifying under section 368(a) of the Code be undertaken for a bona fide
business purpose. SEE GREGORY V. HELVERING, 293 U.S. 465 (1935); Treas. Reg.
Section 1.368-1(b), (c), -2(g). Regulations explain that "the transaction, or
series of transactions, embraced in a plan of reorganization must not only come
within the specific language of section 368(a) of the Code, but the
readjustments involved in the exchanges or distributions must be undertaken for
reasons germane to the continuance of the business of a corporation a party to
the reorganization." Treas. Reg. Section 1.368-2(g).
Management of the Shurgard REIT and of the Management Company have
represented that the Merger is being undertaken by the Shurgard REIT and the
Management Company for reasons germane to their businesses, including, but not
limited to the following:
(a) the proven expertise and substantial experience of the employees of
the Management Company, who will become employees of the Shurgard REIT through
the Merger, in the development, acquisition and management of self-storage
properties;
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 11
(b) to enable the Shurgard REIT to internalize the successful capital
markets experience of the Management Company;
(c) to enable the Shurgard REIT to realize certain efficiencies arising
from a self-managed structure in that it will pay for management and advisory
services directly and will not be paying a third party for such services;
(d) to align the interests of the Management Company with those of the
Shurgard REIT;
(e) to acquire the "Shurgard" name and goodwill associated with that name;
and
(f) to enable the Shurgard REIT to be a self-managed and self-administered
REIT, thereby making the Shurgard REIT more attractive to investors and enabling
it to enjoy enhanced market perception.
Accordingly, we are of the opinion that the business purpose requirement
will be satisfied.
4. BUILT-IN GAIN RULES
Under Notice 88-19, 1988-1 C.B. 486 (the "Built-in Gain Rules"), the
Management Company will be taxed at the Effective Time on the excess of (a) the
fair market value of its assets over (b) the tax basis of those assets, unless
the Shurgard REIT makes an election pursuant to the Built-in Gain Rules or
applicable future administrative rules or Treasury Regulations. The management
of the Shurgard REIT has represented that it will make this election.
Accordingly, we are satisfied Shurgard will not recognize gain under the Built-
in Gain Rules at the Effective Time in the Merger.
C. TAX TREATMENT OF MANAGEMENT COMPANY SHAREHOLDERS IN THE MERGER
The basis of the Management Company shareholders in their shares of
Shurgard REIT Class A Common Stock (including fractional shares thereof deemed
received in the Merger but excluding Contingent Shares recharacterized as
interest) received in the Merger will equal their adjusted basis in the shares
of Management Company Common Stock exchanged therefor. Code Section 358. For
purposes of this calculation, the IRS apparently requires that the Management
Company shareholders assume the maximum number of Contingent Shares will be
issued and that all of the Indemnification Shares will be released, thereby
minimizing their per-share basis in their Shurgard REIT Class A Common Stock
received at the Effective Time.
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 12
Rev. Rul. 76-434, 1976-2 C.B. 108. The holding period of the Shurgard REIT
Class A Common Stock received will include the holding period of the Management
Company Common Stock exchanged therefor. Code Section 1223(2).
The Management Company and its shareholders (other than those exercising
dissenters' rights) generally should recognize no gain or loss upon the receipt
of Shurgard REIT Class A Common Stock in exchange for their Management Company
Common Stock (other than those Contingent Shares recharacterized as interest).
Code Section Section 354, 361. To the extent that they receive cash in lieu of
fractional shares of Shurgard REIT Class A Common Stock, such shareholders will
recognize capital gain (assuming that their shares of Management Company Common
Stock are held as capital assets at the Effective Time), subject to the
limitations of section 302 of the Code (as discussed INFRA in Section III.C.3.).
Code Section 356. The amount of gain so recognized will equal the difference
between such cash and the tax basis allocated to their fractional shares of
Shurgard REIT Class A Common Stock deemed received in the Merger.
Nonetheless, the conclusion that the Management Company or its shareholders
will not recognize income upon the receipt of the Shurgard Class A Common Stock
in the Merger (other than that portion of the Contingent Shares recharacterized
as interest) is based on a number of assumptions and representations herein and
in the Certificates, including a representation that the Shurgard Class A Common
Stock and other consideration received by the Management Company shareholders
will be approximately equal to the fair market value of the Management Company
Common Stock surrendered in the exchange. If one or more of these assumptions
and representations were successfully challenged by the IRS, the Management
Company shareholders may recognize an additional taxable gain. For example, the
IRS might contend that the right to receive Contingent Shares issued to the
Management Company shareholders constituted taxable boot because such right did
not fit squarely within the requirements of the Contingent Stock Guidelines
discussed SUPRA at Section III.B.1.c. This would cause a Management Company
shareholder to recognize gain equal to the fair market value of such right, but
not in excess of the aggregate gain realized by such shareholder in the
Merger.(2) Code Section 356. Alternatively, if the IRS successfully asserted
that a portion of the Shurgard Class A Common Stock issued in the Merger
represented compensation for services rendered by the Management Company or
- --------------------
(2) Note, however, that as long as the aggregate amount of such "boot" does
not violate the continuity of shareholder interest test, the Merger would still
qualify as a reorganization under section 368(a)(1) of the Code. See Section
III B.1. SUPRA.
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 13
its shareholders, then the Management Company or its shareholders would
recognize ordinary income in an amount equal to the fair market value of such
shares.
In addition, we note the following issues:
1. RECEIPT OF CONTINGENT SHARES
A portion of the Contingent Shares issued to Management Company
shareholders should be taxable upon receipt by the Management Company
shareholders as interest income. See Rev. Rul. 70-300, 1970-2 C.B. 125; Prop.
Treas. Reg. Section 1.483-4, 59 Fed. Reg. 64,884 (Dec. 16, 1984). The amount of
interest income recognized should equal the excess of (i) the fair market value
of the Contingent Shares at the time they are issued over (ii) such fair market
value discounted back to the Effective Time using an applicable federal interest
rate so that the amount of interest income will depend upon the time of the
payment of the Contingent Shares. ID.
2. INDEMNIFICATION SHARES
Each Management Company shareholder should be deemed to own at the
Effective Time that portion of the Indemnification Shares that he or she would
receive upon the release of such shares if no payment of such shares is made
during the escrow period. The IRS has ruled that the payment of shares as
indemnification from an escrow fund will not result in gain or loss to the
beneficial owner of the shares if the payment is calculated on the basis of the
fair market value of the shares at the time of the initial reorganization and
the beneficial owners of the shares have no right to substitute other property
for the shares in the event of a repossession. Rev. Rul. 76-42, 1976-1 C.B.
102. Accordingly, the Management Company shareholders should recognize no gain
or loss upon a transfer of Indemnification Shares to the Shurgard REIT.
Additionally, the basis of such shares should be added to the basis of the
Indemnification Shares remaining in the escrow fund. ID.
3. EXERCISE OF DISSENTERS' RIGHTS
Management Company shareholders who exercise dissenters' rights should
recognize gain or loss equal to the difference between such cash and the tax
basis in their shares of Management Company Common Stock relinquished therefor,
and such gain or loss should constitute capital gain or loss if their shares of
Management Company Common Stock are held as a capital asset at the Effective
Time. Code Section Section 1001, 1221. However, it is likely that section 302
of the Code applies to the payment of cash to dissenting shareholders. See
CLARK V. COMMISSIONER, 489 U.S. 726 (1989) (applying section 302 of the Code to
reorganization boot). Accordingly, under certain limited circumstances, a
Management Company shareholder
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 14
exercising dissenters' rights may recognize ordinary income to the extent of the
cash received if the resulting redemption were not treated as a complete
termination of the interest of the Management Company shareholder in the
Shurgard REIT, after application of certain attribution rules under section 318
of the Code.
D. SHURGARD REIT'S RECEIPT OF INDEMNIFICATION SHARES
Typically a purchaser recognizes no gain or loss upon the receipt of
property as an adjustment to purchase price. The Agreement provides that the
Shurgard REIT's receipt of any Indemnification Shares is to be treated as an
adjustment to purchase price. In addition, the IRS has ruled that the return of
shares by a seller to purchaser as payment under an indemnification arrangement
is an adjustment to purchase price when the payment price is based upon the fair
market value of the shares at the time of the initial sale and the beneficial
owners of the shares have no right to substitute other property for the shares
in the event of a repossession. Rev. Rul. 76-42, SUPRA; G.C.M. 36386 (Aug. 22,
1975). Accordingly, the Shurgard REIT should recognize no gain or loss upon the
receipt of Indemnification Shares from the Escrow Fund. However, the IRS might
take the position that such return constituted ordinary income to the Shurgard
REIT, particularly if the related indemnification claim was for lost profits of
the Shurgard REIT. SEE ARROWSMITH V. COMMISSIONER, 344 U.S. 6 (1952)
(characterization of repayment determined by character of original payment).
IV. OPINION
Based upon the foregoing:
A. We believe the following will be the consequences of the Merger for
the Shurgard REIT and the Management Company for federal income tax purposes:
1. The Merger will qualify as a reorganization under section 368(a) of
the Code;
2. Each of the Management Company and the Shurgard REIT will be a "party
to the reorganization" under section 368(b) of the Code;
3. no gain or loss will be recognized by the Shurgard REIT or the
Management Company and the Shurgard REIT in the Merger;
4. Immediately following the Effective Time, the assets of the Management
Company in the hands of the Shurgard REIT will have the same adjusted tax basis
as they had in the hands of the Management Company immediately before the
Effective Time; and
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 15
5. The holding period for each of the assets of the Management Company in
the hands of the Shurgard REIT following the Effective Time will include the
period each asset was held by the Management Company immediately prior to the
Effective Time.
B. In addition, we believe the following should be the federal income tax
consequences of the Merger for the shareholders of the Management Company:
1. No gain or loss should be recognized by Management Company
shareholders upon receipt of shares of Shurgard Class A Common Stock in exchange
for their shares of Management Company Common Stock (other than Contingent
Shares recharacterized as interest income), except that Management Company
shareholders who receive cash in lieu of a fractional share of Shurgard Class A
Common Stock should recognize gain equal to the difference between such cash and
the tax basis allocated to their fractional shares of Shurgard Class A Common
Stock, and such gain should constitute capital gain if their shares of
Management Company Common Stock were held as a capital asset at the Effective
Time;
2. The tax basis of the shares of Shurgard Class A Common Stock received
(including fractional shares of Shurgard Class A Common Stock deemed received)
in the Merger by Management Company shareholders (other than Contingent Shares
recharacterized as interest) should be the same as the tax basis of their shares
of Management Company Common Stock exchanged therefor and, until the final
payment of Contingent Shares, such basis shall be determined as though the
maximum number of Contingent Shares had been issued under the Agreement and all
of the Indemnification Shares are released at the end of the escrow period; and
3. The holding period of the shares of Shurgard Class A Common Stock
(other than Contingent Shares recharacterized as interest income) in the hands
of the Management Company shareholders should include the holding period of
their shares of Management Company Common Stock exchanged therefor, provided
such shares of Management Company Common Stock are held as a capital asset at
the Effective Time.
V. LIMITATIONS
A. Our opinion is limited to the specific matters described above and in
the Agreement. We give no opinion with respect to other tax matters, whether
federal, state, local or foreign, that may relate to the Merger, including,
without limitation, any opinion regarding the consequences of the InterMation
Spin-off.
B. We caution that our opinion is based on the facts, assumptions and
representations contained herein and in the Certificates and on the federal
income tax laws as
<PAGE>
Shurgard Storage Centers, Inc.
Shurgard Incorporated
February 14, 1995
Page 16
they exist on the date hereof. It is possible that subsequent changes in such
facts, assumptions or representations could occur or that subsequent changes in
the tax law could be enacted and applied retroactively to the Merger. Any such
changes could affect this opinion.
C. This opinion is furnished solely in connection with the Merger. It
may be provided as an exhibit to the Proxy Statement/Prospectus. Any other use
is not permitted. We hereby consent to the use of our name in the Proxy
Statement/Prospectus under the headings "RISK FACTORS--Merger as a Taxable
Event," "THE MERGER--Conditions to Consummation of the Merger--Conditions to the
Obligations of the Shurgard REIT," "FEDERAL INCOME TAX CONSEQUENCES--Tax
Treatment of the Merger" and "TAX OPINION."
Very truly yours,
/s/ Perkins Coie
------------------
PERKINS COIE
